Where we find ourselves today has just about all been entirely predictable, as readers of The Automatic Earth know only too well; we've predicted most of what's happening now pretty accurately (going forward, remember what we've said about the dollar and about gold). Not predictions of the exact timing, but that's not the essence, except perhaps when you're a day trader; but even they have children.

The essence is the very simple fact that a debt crisis can't be averted with more debt (again, barring warfare, zero-point energy and meteor strikes). And that a debt crisis of the present magnitude inevitably leads to a credit crunch that paralyzes entire economies, in this case even the whole global economy as we have come to know it.

Once you accept that, measures completely different from what we have seen so far and what is now being touted once more, are called for. But we're not getting these different measures; it's as if those who "lead" the world are able to live and think in two dimensions only, whereas comprehension of a third dimension is needed to understand the issues at hand.

All these so-called leaders refuse to accept the possibility that monetary and fiscal policy may not hold the tools to fix the mess and get back to normal, or whatever passes for it. Yes, there’s a political crisis. But it's not that they can't get their act together to dump more public funds into the alleged right places, it's that dumping public funds is the only measure they can think of.

The underlying idea is that if banks' assets (debts) would be marked to market right now, the banks would be broke. By injecting trillions more, the hope is that asset values will recover. Still, that is not what has happened so far; the opposite has happened. It's the notion that markets are cyclical, hence they must come up again. But even if that's true, cycles can be long, and the banks don't have decades to save themselves.

Short version: by issuing trillions more in debt, governments and central banks -apparently- hope they can turn around financial markets, and have them recover to heights that would turn today's losses into tomorrow’ profits (or at least more bearable losses).

There are lots of voices that will tell you that we didn't need to be where we are, that things could have been done: (If Leadership Fails, Prepare for Recession!). They all mean more or less the same things: capital injections into the financial industry. A financial industry that is by and large broke and now depends on money from governments and their taxpayers all of whom are by and large broke.

Amidst all the fear and panic and selling, let me repeat what I've said a thousand times by now: there is no way out of this crisis that does not involve defaults on debt, restructuring of debt and bankruptcies caused by debt. Nothing else will achieve anything other than window dressing. In other words: all we've seen so far has been window dressing, and of a very expensive kind.

Yes, it’ll be tough, yes, it’ll be severe, yes, it’ll be brutal. But isn't it true that nothing's more brutal than having to listen day after day year after year to over-paid clowns lying through their teeth and other body parts and then in in the end still wind up in a situation that's in all likelihood even worse than where you would be if you’d have shut them out from the start?

The real problem is not, as a plethora of voices is now proclaiming, that governments have a hard time reaching consensus on recapitalizing the banking system. The real problem is that they are still, despite all the trillions squandered on exactly this approach, even considering doing so.

When we hear Lagarde, or Zoellick, or anyone of the "trusted" media pundits, say that all that's really needed is for "leaders" to "get their act together", what they mean is that a lot more money should be pumped into the financial system, and into broke governments. For people like Paul Krugman and his ilk, there is only one possible problem with stimulus measures: that they're too small. In other words: if a stimulus measure is large enough, it will solve any problem.

However, that idea of course carries its own problem: that the agent that does the stimulating will itself get into financial trouble. And who then will bail IT out? These ideas are based on the notion that no amount of debt can be large enough to overwhelm an entire financial system, or economy. That is not a very intelligent notion, if you ask me. It carries with it the idea that debt can be cancelled out with more debt.

The IMF’s Global Financial Stability Report this week suggested that European banks could be "saved" with a capital injection of perhaps around $400 billion. But the IMF, like everyone with a pair of functioning neurons, knows full well that that wouldn't save the banks. It would only and simply allow them to live another day or two. And then the game would start anew, exactly like it has over the past, let's say, 50 months. This is true of all stimulus, all QEs, all of it.

That is, unless a miraculous growth spurt appears out of the blue and against all the odds dictated by reality as we know it today. In other words, more capital injections simply and only mean more double or nothing gambling. We need restructuring, not replenishing. We need to sleep this one off, not get a refill.

This is not a simple difference of opinion, where one option is as valid as the other. There is no way the Lagardes and Zoellicks of the world can "know" that what they propose will achieve what they say it will. They refuse to believe - at least in public, let me add-, and therefore even consider, that the banks and indeed the entire system can go belly-up. And they also refuse to believe that throwing more money into the pit will not at some point be enough to fill that pit.

We need to get rid of these clowns. Unfortunately, I have very little faith that we actually will, if only because in the end, as much as our "leaders", we all are the clowns. As the Sondheim song goes: "Don't bother, they're here". Getting rid of the clowns is an almost entirely hypothetical situation, in the exact same way that solving debt with more debt is.

What governments need to do at this stage, and it's years overdue, is to ringfence their citizens, in order for them not to lose even more money than they already have. And then to combine that with a massive restructuring, with many defaults and bankruptcies, of the banking system (but without losing citizens' deposits) and the non-banking system that carry too much debt on their books.

Our present day "democratic" political systems are woefully inadequate to kick out the clowns and replace them with people that make sense, and are willing to do so for the masses.

But until we get a system that is capable of achieving this, we are in for a whole lot more misery.

Global markets whipsawed higher and lower at the end of a tumultuous week as panic over a Greek default was tempered by hopes that politicians will step in to calm Europe's debt crisis.

The FTSE 100 closed up 25.20 to 5,066.81 on Friday, but ended the week down 5.62pc, with £78bn knocked off the value of Britain's blue-chip companies. While the index closed higher, it had fallen as much as 1.6pc earlier in the day, dropping through the pyschologically important 5,000 mark.

The falls came as traders were left underwhelmed by a communique rushed out in the early hours of Friday morning by G20 finance ministers at the IMF meeting in Washington. In the wake of Thursday's global stock market rout, the G20 committed "to take all necessary actions to preserve the stability of banking systems and financial markets" but was criticised for failing to introduce concrete measures.

Speaking at the IMF meeting on Friday, UK Chancellor George Osborne ratcheted up the pressure on European leaders to solve the crisis by calling on them to bolster the European bail-out fund and declaring they have just six weeks to find solutions. "Patience is running out in the international community... More needs to be done to avoid a disorderly outcome," he said, before referring to the next G20 meeting in Cannes on November 3 and 4. "The eurozone has six weeks to resolve its political crisis."

The comments came amid speculation that eurozone policymakers were considering boosting the size of the region's bail-out fund, the European Financial Stability Facility (EFSF), and rumours that France could step into help its banking system. The G20 communique had earlier called on the eurozone to "increase the flexibility of the EFSF, to maximise its impact".

The FTSE 100's move higher was mirrored across Europe, with the Dax in Frankfurt up 0.63pc and France's CAC 1.02pc higher. In the US the Dow Jones was little changed at 10,727.00. Any optimism came towards the end of another difficult day in which concerns were heightened after the European Commission denied a report that it was considering recapitalising the region's banking system. "There is no big European plan to recapitalise banks," said Olivier Bailly, an EC spokesman, pointing out that eurozone banks have already received €420bn (£367bn) in capital since 2008.

The comments came as Evangelos Venizelos, Greece's finance minister, was forced to issue a statement after newspaper reports claimed he had said an orderly default was one of three options open to the country. "Greece has taken the final decision to do everything in its power in order for all the European Council decisions... to be implemented fully," he said. "All other discussions, rumours, comments and scenarios... do not offer good service."

In a further blow for markets, Royal Bank of Scotland analysts issued a report in which they forecast that Europe would move into recession early next year. Investors continued to liquidate positions in commodities from metals to oil, moving to safe haven government bonds. The yield on German bunds fell to a new record of 1.64pc, with US Treasuries also setting a new low of 1.7pc.

Obama urges France and Germany to move quickly to find a solution to the eurozone crisis, while UK chancellor George Osborne claims Britain is 'ahead of the curve'

EU leaders were under renewed pressure today to agree immediate steps towards a full-scale rescue of ailing eurozone economies or risk a stock market rout when exchanges open on Monday. Fears that months of debate over how to resolve the Greek debt crisis had brought the world economy to another "Lehman's moment" led several prominent analysts to warn that the situation could spark a run on bank stocks next week.

President Obama and the US treasury secretary, Tim Geithner, welcomed a commitment by the European Central Bank to step up its efforts to boost growth, which could mean a cut in interest rates at its next meeting in October, but pressed France and Germany to move quickly with a rescue package to prevent further turmoil.

George Osborne warned that the leaders of the eurozone had six weeks to end their political wrangling and resolve the continent's crippling debt crisis. Eric Wand, a gilts strategist at Lloyds Corporate Markets, said: "If we come in on Monday with nothing on the table, then we'll be back to the races." Wand warned that loans from the ECB would be more sticking plaster and unlikely to satisfy investors. "[They] are hoping for a co-ordinated policy response. If we get that, then risk assets could rally, but for how long? More liquidity doesn't really cut the mustard," he said.

Stocks rallied today after G20 leaders said they would do all in their power to prevent another crash. The FTSE rebounded after the assurance to finish the day up 25 points at 5066 while the German Dax and French CAC both ended the day marginally higher.

But a week of speculation that several eurozone banks could be wrecked by defaults in the peripheral countries without further ECB support and large capital injections has helped knock $3.4tn (£2.2tn) off global stock values since Monday. The FTSE had its second worst week this year and French and German exchanges remain at two-thirds of their value in July. Commodities fell to a nine-month low as silver, copper and nickel tumbled. The Standard & Poor's GSCI Index of 24 commodities fell as much as 2.2%, leaving it 7.8% lower than at the start of the week.

Speaking in Washington, Osborne said that the turmoil in the world's financial markets meant there was now "a far greater sense of urgency" and mounting pressure on Europe from the G20 group of developed and developing nations. "There is a sense from across the leading lights of the eurozone that time is running out. There is a clear deadline at the Cannes (G20) summit in six weeks time," the chancellor said. "The eurozone has six weeks to resolve this political crisis." He added that "bad politics" were leading to "bad economics" in the eurozone. "We need political solutions that can help resolve the economic problems."

Osborne said the package of measures agreed in July to provide financial support for troubled members of the single currency needed to be implemented, as well as ensuring banks had enough capital to withstand market pressures. "I wouldn't say all the pieces of the jigsaw are in place," Osborne said, adding that the members of the eurozone had to supplement monetary union with closer fiscal ties.

While the government had no intention of joining monetary union, the chancellor said it was in Britain's interests for the eurozone to work. "The break-up of Europe would be bad for Britain." The chancellor said Europe needed to show that it had enough firepower to convince the markets it was getting ahead of the curve, and made it clear that the €440bn European Financial Stability Facility needed to be beefed up. "I am not sure it is adequate," Osborne said.

He refused to speculate on whether Greece would be forced to default on its debts, but said the government had contingency plans in the event that the worst-affected eurozone country did capitulate. "I have made it a priority for the Financial Services Authority and the Bank of England to make sure that the UK banking system is adequately capitalised and have sufficient liquidity to deal with all eventualities. We have stress-tested sovereign writedowns."

Osborne admitted that the darkening international economic outlook would have repercussions for the UK but insisted that he had no intention of amending his tough deficit reduction plans. It was up to the Bank of England, he added, to support demand over the coming months. "A credible fiscal plan allows you to have a looser monetary policy than would otherwise be the case. My approach is to be fiscally conservative but monetarily active."

His comments come amid signs from Threadneedle Street that it would restart its quantitative easing programme over the coming months. The Bank pumped £200bn of electronically created money into the economy between early 2009 and early 2010 in an attempt to lift the economy out of recession.

Asked how bad the situation in the UK would have to get before he would consider changing course, Osborne said: "The UK is taking appropriate action. It is very clear what has got to happen. We are sticking to the plan. These discussions in Washington are about the eurozone and the challenges there, not about market pressures on the UK. We have got ahead of the curve and have credibility."

The chancellor said the heavily indebted state of Britain meant that he could not simply "pull a lever" to boost demand. "This was a different sort of recession and it is a different sort of recovery," he said.He added that there was a certain amount of flexibility built into his budget plans because weaker growth would allow the automatic stabilisers – a bigger budget deficit caused by higher benefit payments and lower tax receipts – to kick in.

The government would announce supply-side reforms of the economy to remove obstacles to growth over the coming months, Osborne said.

Stocks fell, pushing the MSCI All- Country World Index of 45 nations into a bear market for the first time in more than two years, after the worsening European debt crisis and threat of a U.S. recession erased more than $10 trillion from equities since May.

The MSCI index, which slipped 0.3 percent as of 1:33 p.m. in Hong Kong today, has lost more than 20 percent since peaking on May 2, meeting the common definition of a bear market. It tumbled 4.5 percent to a 13-month low of 277.38 yesterday. The MSCI World (MXWO) Index of shares in developed nations also fell into a bear market yesterday, plunging 4.2 percent. The MSCI Emerging Markets Index reached the 20 percent threshold on Sept. 13.

The world is poised for a financial crisis, Mohamed El- Erian, chief executive officer of Pacific Investment Management Co., said in Washington yesterday. Finance chiefs from the Group of 20 nations pledged late yesterday to address “heightened downside risks” to the global economy, echoing language used by the Federal Reserve on Sept. 21 when it announced a $400 billion plan to spur growth as the recovery from the worst contraction since the Great Depression falters.

“The market is pricing in a recession,” said Ng Soo Nam, the Singapore-based chief investment officer at Nikko Asset Management Co., which oversees about $154 billion. “Stocks are looking cheap, but it will take a lot of courage to believe that. Things could get worse. The risk of a sovereign-debt default in Greece is the most significant concern.”

Valuations SinkThe MSCI All-Country World Index has retreated 19.8 percent since July 22. It fell after Standard & Poor’s cut the U.S. credit rating following a debate over raising the nation’s borrowing limit, speculation Greece will default intensified, and Chinese inflation accelerated to a three-year high. The slump pushed the price-earnings ratio for the index down to 11.4, the lowest since March 2009 and 46 percent less than the 16-year average, data compiled by Bloomberg show.

The Standard & Poor’s 500 Index extended its drop since its peak on April 29 to 17 percent. The gauge has retreated even as analysts raise projections for 2011 profit to a record $99.34 a share this year from $98.73 on April 29, according to the average analyst estimate in a Bloomberg survey.

Benchmark measures for five out of 24 developed markets haven’t posted a 20 percent slump from their highs: the U.S., U.K., Canada, Singapore and New Zealand, according to data compiled by Bloomberg. Eight out of 21 developing nations aren’t in bear markets, including South Africa. The MSCI Emerging Markets Index has retreated 27 percent since its 2011 high on May 2.

Europe, AsiaThe 15 national stock gauges with the biggest losses since the MSCI All-Country World peaked on May 2 are for European countries. Greece’s ASE Index has lost 42 percent, Italy’s FTSE MIB Index has plunged 40 percent and Hungary’s Budapest Stock Exchange Index has retreated 38 percent.

Policy makers are “committed to a strong and coordinated international response to address the renewed challenges facing the global economy,” G-20 finance ministers and central bank governors said in a previously unplanned statement in Washington. Many urged Europe to implement a July promise to expand the powers of a rescue fund, Japanese Finance Minister Jun Azumi said.

The Euro Stoxx 50 Index has tumbled 28 percent since July 22 as Greece edged closer to defaulting on its sovereign debt and the cost of insuring western European countries’ loans rose to records. The MSCI Asia Pacific Index has fallen 19.7 percent since its 2011 high on May 2. China’s Shanghai Composite Index has tumbled 23 percent since its peak in November, and Japan’s Topix has slumped 25 percent since April 2010.

Bad Ending“Europe is going to continue to unwind and eventually end up badly for the global economy,” Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which oversees $4 billion, said in a telephone interview. “There are so many questions, so many uncertainties.”

The 20 percent decline in global equities ended the bull market that began in March 2009. The MSCI All-Country World Index climbed as much as 107 percent during the rally. The measure avoided a bear market in 2010, when it fell 16 percent between April 15 and July 5. The index rebounded after Federal Reserve Chairman Ben S. Bernanke foreshadowed $600 billion in bond purchases meant to prevent deflation and stimulate growth at an Aug. 27, 2010, meeting in Jackson Hole, Wyoming.

Financial stocks, which posted the biggest losses in the last bear market, are leading declines again amid growing concern that European banks will have to write down their holdings of government debt. Banks, brokerages and insurers in the MSCI All-Country World have collectively lost 31 percent since May 2.

Financial companies in the worldwide index sank 77 percent during the last bear market as government bailouts rescued the biggest U.S. banks from collapse and Lehman Brothers Holdings Inc., once the nation’s fourth-biggest securities firm, filed the nation’s largest bankruptcy in September 2008.

More than $37 trillion was erased from global equity values in the previous bear market that lasted for 16 months after the MSCI All-Country World peaked on Oct. 31, 2007. The index fell as much as 60 percent amid the first global recession since World War II and more than $2 trillion in losses and writedowns at financial companies worldwide after housing prices dropped.

“We could be on the eve of the next financial crisis,” Barton Biggs, managing partner and co-founder of hedge fund Traxis Partners LP in New York, said during a Bloomberg Television interview with Matt Miller and Carol Massar yesterday. The firm has $1.4 billion in assets. “We shouldn’t be because there are things that could be done to avert it, but they haven’t been done. There’s no signs that the authorities are going to do them.”

Cameron speech says failure of eurozone leaders to stabilise single currency is taking world economy to brinkThe global economy is close to "staring down the barrel" and is threatened by the failure of eurozone leaders to agree a lasting settlement to stabilise the single currency, David Cameron warned on Thursday night.

As markets tumbled around the world, amid gloomy assessments from the IMF and the World Bank, the prime minister issued his gravest warning about the global economic outlook and bluntly told eurozone leaders to stop "kicking the can down the road". "We are not quite staring down the barrel but the pattern is clear," the prime minister told the Canadian parliament in Ottawa.

"The recovery out of the recession for the advanced economies will be difficult. Growth in Europe has stalled, growth in America has stalled. The effect of the Japanese earthquake, high oil and fuel prices is creating a drag on growth. But fundamentally we are still facing the aftermath of the world financial bust and economic collapse in 2008."

Cameron's speech came as Christine Lagarde, the managing director of the International Monetary Fund, warned world leaders that "time is of the essence" as investors took fright at politicians' failure to tackle sickly global growth and the spiralling eurozone debt crisis.

As Cameron spoke, the FTSE 100 index tumbled 246 points, or 4.67%, to close at 5041 – the blue-chip index's worst daily fall in percentage terms since March 2009. On Wall Street, the Dow Jones index closed 3.5% down at 10773 points, while share prices in France and Germany also dropped sharply.

The prime minister identified one of the main problems as the failure of eurozone leaders to agree a "lasting solution" to stabilise the single currency. "The problems in the eurozone are now so big that they have begun to threaten the stability of the world economy," Cameron said. "Eurozone countries must act swiftly to resolve the crisis. They must implement what they have agreed and they must demonstrate they have the political will to do what is necessary to ensure the stability of the system. One way or another, they have to find a fundamental and lasting solution to the heart of the problem – the high level of indebtedness in many euro countries."

In an interview with Channel 4 News, the prime minister used blunter language to call for eurozone leaders to offer stronger political backing for the €440bn (£386bn) bailout mechanism, known as the European Financial Stability Facility. In a message to the 17 eurozone leaders, he said: "We cannot go on kicking the can down the road. We need decisive action, swift action to deal with this issue."

The prime minister showed how Britain is beginning to distance itself from its EU partners by signing a letter with five other world leaders outside Europe calling on eurozone leaders to "act swiftly". The letter to the French president, Nicolas Sarkozy, in his capacity as president of the G20, says: "We have not yet mastered the challenges of the crisis."

The letter, designed to help shape the agenda at the next G20 meeting in Cannes in November, is likely to be seen as a major departure in British diplomacy, which has been anchored in the EU for the past four decades. It is unprecedented for a British prime minister to join forces with two other Commonwealth leaders – Canada's Stephen Harper and Australia's Julia Gillard – and three other leaders from outside the EU to issue a warning to the main EU member states.

The prime minister's language shows Britain's deep frustration with the failure of eurozone leaders to grapple with the crisis in the single currency. Cameron wants action in two areas: greater political will behind the eurozone bailout mechanism, and moves towards greater fiscal integration in the eurozone, though not in the rest of the EU, in the medium to long term. "The remorseless logic of economic and monetary union is fiscal integration," a British source said.

In his Ottawa speech the prime minister also echoed the IMF's calls for Europe's banks to be strengthened and added that euro countries should reform their labour markets. "Whatever course they take, Europe's banks need to be made strong enough so that they can help support the recovery, not put it at risk," Cameron said. "At the same time, we cannot put off the fundamental problem of the lack of competitiveness in many euro-area countries.

"Endlessly putting off what has to be done doesn't help, in fact it makes the problem worse, lengthening the shadow of uncertainty that looms over the world economy."

The letter to Sarkozy was initially interpreted as a warning to Barack Obama, who recently outlined a $440bn (£287bn) jobs package for the US. British officials rejected this interpretation because the Obama plan is fiscally neutral and because the letter was carefully balanced. The latest sell-off in the world's financial markets came after a key manufacturing survey in China suggested its economy is faltering, and the Federal Reserve's latest emergency measure, Operation Twist, failed to calm markets.

G20 finance ministers will discuss the darkening economic outlook on Friday in Washington on the fringes of the IMF's annual meeting. Lagarde told reporters in Washington that "our actions, our analysis and our proposed policy mix is not dictated by the day-to-day variations of the Dow Jones, the Nasdaq, the Cac or the Dax".

But she called on Europe and the US to rediscover the spirit of the London G20 conference at the depths of the financial crisis in 2009, when leaders promised to boost the IMF's resources, bail out banks and avoid tit-for-tat protectionism.

Lagarde said the priority must be "implementation, implementation, implementation", but she conceded that politicians now had less scope for action than three years ago in the wake of the collapse of Lehman Brothers. "In 2008, there was a much wider path for recovery, because the sovereigns had more room for manoeuvre. They incredibly ably managed to avoid protectionism, to kick-start growth, and to make sure than the financial pipes that fuel the economy worked again."

In Greece the government announced a fresh round of austerity measures on Tuesday, including pension cuts and tax rises for low earners, in an attempt to persuade its creditors, including the IMF, to release the latest €8bn tranche of rescue funds. But many investors now believe default for the debt-burdened state is inevitable.

The Federal Reserve chairman, Ben Bernanke, had hoped to soothe investors' fears on Wednesday by announcing Operation Twist, aimed at driving down long-term interest rates and boosting the ailing American housing market. But share prices around the world plunged after the announcement as investors became fixated instead on the Fed's warning that the economy faced "significant downside risks".

Greek Finance Minister Evangelos Venizelos told members of the ruling party that he sees three possible outcomes to the debt crisis, including one that involves an orderly default with a 50 percent loss for bondholders, Ta Nea said, without citing anyone.

Venizelos outlined "good, bad and better" scenarios to lawmakers with the "good option" involving the implementation of the July 21 accord for a second financing package, which projects a 20 percent loss for bondholders, the Athens-based newspaper said.

The "bad" scenario is a collapse of the accord and a disorderly default, Ta Nea said. The "better" one involves an orderly default in the euro area with Venizelos indicating a 50 percent haircut for investors, the newspaper said. That outcome isn’t something Greece can request and requires the agreement and coordination of many actors, Ta Nea said.

With French banks now a daily highlight in the market's search for the next source of contagion, and big, multi-syllable words such as conservatorship and nationalization being thrown about with increasingly reckless abandon, perhaps it is time to consider the downstream effects of a French bank blow up.

And we are not talking French sovereign troubles, which are about to get far worse with the country's CDS once again at record highs means the country's AAA rating is as good as gone. No: banks, as in those entities that are completely locked out from the dollar funding market, and which will be toppled following a few major redemption requests in native USD currency.

Which in turn brings us to...Morgan Stanley, the little bank that everyone continues to ignore for assumptions of a pristine balance sheet and no mortgage exposure. Well, hopefully we can debunk one of these assumptions by presenting the bank's Cross-Border Outstandings, which "include cash, receivables, securities purchased under agreements to resell, securities borrowed and cash trading instruments but exclude derivative instruments and commitments.

Securities purchased under agreements to resell and Securities borrowed are presented based on the domicile of the counterparty, without reduction for related securities collateral held." We'll leave it up to readers to find the relevant number.

The president of the Dutch central bank said in a newspaper interview published Friday that he no longer rules out the possibility that Greece may not be able to pay back its crippling government debt. A Greek default "is one of the scenarios," Klaas Knot said in an interview published in respected Dutch newspaper Het Financieel Dagblad.

"I won't say that Greece cannot default," said Knot, who is the recently installed president of De Nederlandsche Bank and a member of the governing council of the European Central Bank. Knot's comments are unusual because they come from a member of the European Central Bank's 23-member governing council. The bank has insisted Greece must stick with its bailout plan and has opposed default as a solution.

"I have long been convinced that a default is not necessary," Knot said. "But the news from Athens is sometimes not encouraging. All efforts are aimed at preventing this, but I am now less positive in ruling out a default than I was a few months ago."

Many economists say that Greece's debt burden is unsustainable and that bond markets have sent the prices of Greek bonds so low that they reflect a likely default. A Greek default could send shockwaves through the eurozone banking system and the global economy. European officials have tried to prevent one because it could mean losses for banks that hold Greek government bonds and prompt speculation that other governments with shaky governments could face increasingly acute funding pressures.

Greek bondholders have already agreed to take a 21 percent loss on the value of their investments in a swap for new bonds. That loss is relatively mild by the standard of government defaults, which often inflict losses of 50 percent or more. Many economists say the current swap arrangement does not give Greece enough debt relief.

Moody's ratings agency downgraded eight Greek banks by two notches Friday due to their exposure to Greek government bonds and the deteriorating economic situation in the debt-ridden country, whose government has struggled to meet the terms of an international bailout.

Moody's Investors Service downgraded National Bank of Greece, EFG Eurobank Ergasias, Alpha Bank, Piraeus Bank, Agricultural Bank of Greece and Attica Bank to CAA2 from B3. It also downgraded Emporiki Bank of Greece and General Bank of Greece to B3 from B1. The agency said the outlook for all the banks' long-term deposit and debt ratings was negative.

Moody's cited "the expected impact of the deteriorating domestic economic environment on non-performing loans" and "declines in deposit bases and still fragile liquidity positions" in its reasoning for the downgrade.

Greece has angered its international creditors by lagging behind in its commitments to implementing reforms and carrying out pledges it has made to secure funds from its euro110 billion ($149 billion) bailout from other eurozone countries and the International Monetary Fund.

In a rush to secure the disbursement of the vital next batch of loans, worth euro8 billion, and heading toward a fourth year of recession, the government this week announced another round of tax hikes and pension cuts, angering an already austerity-weary public which has responded with strikes.

Public transport workers and taxi drivers are expected to hold a 48-hour strike next week that will leave Athens without any form of public transport, while air traffic controllers have declared a 24-hour strike this Sunday. A nationwide general strike is set for Oct. 19.

Debt inspectors from the IMF, European Central Bank and European Commission, collectively known as the troika, are due back in Athens next week to complete their review of Greece's progress and make a recommendation on whether it should receive the next loan installment. Without it, Greece will run out of cash in mid-October.

Moody's said that despite its downgrade, it "recognized the continued potential for the Troika to extend systemic support to the Greek banks in case of need," as well as the potential of a Greek financial stability fund to do the same. This "results in a one notch of uplift in the senior debt and deposit ratings of the domestically owned banks from their standalone credit strength," the agency said.

After more than a year and a half of repeated rounds of austerity measures that have included salary and pension cuts in the public sector and waves of tax hikes, Greece has found itself in the grips of a major recession, with its chances of returning to growth next year all but out of reach. The government insists it hopes to post a primary surplus -- spending less than it earns before taking interest rates on outstanding debt into account -- next year.

Moody's pointed out that the country's economy contracted by 7.3 percent year-on-year in the second quarter of this year, while unemployment has risen to more than 16 percent. This, it said, also affected the potential benefits of the announced merger of Greece's second and third largest lenders, EFG Eurobank Ergasias and Alpha Bank.

While the merger "has some potential positive elements for the credit standing of the future joint entity ... Moody's believes that these are offset by the currently fragile operating environment," the agency said. "From a credit perspective, the near term risks in the form of possible systemic shocks outweigh the potential future benefits emanating from this merger."

Greek workers staged a 24-hour strike on Thursday forcing the transport system to a standstill in protest against the government's intensified austerity drive to secure aid to save the debt-laden country from bankruptcy.

Striking taxi drivers and bus, metro and rail workers meant commuters had to use their own cars, triggering kilometers-long traffic jams and stranding tourists at hotels in Athens' ancient city center for several hours. Unions said more strikes were planned.

About 1,000 members of Communist group MAS marched to parliament chanting "Resist" and "Plutocracy should pay for this crisis" as part of the first big nationwide rallies since June when daily protests ended in bloody clashes with police. Another 6,000 students, some with black flags, and teachers joined them outside parliament. There was a big riot police deployment and the rallies dispersed peacefully.

In his first public comments on yet more austerity moves, Greek Prime Minister George Papandreou said they were vital. "There is no other path. The other path is bankruptcy, which would have heavy consequences for every household," he said after a meeting in parliament with deputies from his ruling Socialist party.

After a "troika" including EU and IMF inspectors made clear they were losing patience with the government's failure to meet the targets of a bailout and threatened to withhold aid, the cabinet agreed on Wednesday to front-load austerity measures in a strategy expected to win them more time and money. "For the troika at the moment it's enough and the measures will be approved by parliament. The troika will release the next tranche," Christoph Weil, a senior economist at Commerzbank, told Reuters.

"We Have No Hope"Greece must now confront the trickier issue of how to collect extra taxes and implement the painful measures although commentators said the fiery opposition of the past amongst some protesters had given way to weary resignation. Policymakers and economists fear a Greek default on its 340-billion-euro debt could set global markets tumbling and push other vulnerable euro zone members like Italy and Spain over the edge, risking plunging the West back into recession.

As well as cutting pensions and extending a real estate tax rise, the cabinet said it would put 30,000 civil servants in "labor reserve" this year, cutting their pay to 60 percent and giving them 12 months to find new work in the state sector or lose their jobs. "This is a policy we do not tolerate, we do not want. We are in continuous, total, permanent opposition to it," said Yannis Panagopoulos, president of private sector employees union GSEE, speaking on state NET TV.

With the economy expected to contract by at least 5 percent this year, after a 4.4 percent slump in 2010, and unemployment at 16 percent and rising, most Greeks hold little hope austerity measures will help the nation emerge from crisis.

"We are living in terror that we may lose our jobs, our lives. Even if these lay-offs are necessary, we are not being treated like humans," said Costas Andrianopoulos, 32, who works at the National theater. "They cut our wages and our pensions and we took it. But I don't believe any more that any of this is for the good of the country. We'll be sacrificed for nothing. We can't avoid default, We have no hope."

The conservative opposition, which has a slim lead over Papandreou's Socialists in opinion polls and has called for snap elections, maintained its refusal to cooperate with the government, which has irked EU leaders.

Troika To Athens Next Week"The euro zone's leading nations are nervous and are taking it out on us," Finance Minister Evangelos Venizelos said on Thursday, pursuing a familiar line that Greece is being made into a scapegoat for wider problems. "We must fully honor our obligations so that no pretexts can be used (against us)."

The country remains bitterly divided between private sector workers who say a bloated state bureaucracy is strangling Greeks and public servants who say the biggest problems are political corruption and tax evasion. The new measures followed warnings from the EU and IMF inspectors that Greece must stop missing the targets of its five-year bailout plan or miss the 8-billion-euro ($11 billion) aid tranche it needs to pay salaries next month.

After more than a year of Greece consistently falling behind on its commitments, the head of an EU taskforce helping Athens said on Thursday he now saw a greater willingness by Greek officials to put the reforms in place. But troika officials, wary of Greek government inertia, will be closely scrutinizing the latest proposals to see if they are sufficient to plug fiscal gaps and can be implemented swiftly, ahead of meetings between Venizelos and finance ministers and senior IMF officials in Washington this week.

Government officials expected the measures to be passed by parliament in the next two to three weeks after they have been discussed with the troika team which is expected to return to Athens early next week to complete their review.

Small business owners in Greece have long been the backbone of the economy and reliable taxpayers in a country where tax evasion is rampant. That, though, is now changing. Self-employed workers like Angelos Belitsakos have had enough of rising taxes and have begun to revolt.

The people who could ultimately give Greece the coup de grace are not the kind to throw stones or Molotov cocktails, and they have yet to torch any cars. Instead, they are people like 60-year-old beverage distributor Angelos Belitsakos, people who might soon turn into a real problem for the economically unstable country. Feeling cornered, he and other private business owners want to go on the offensive. But instead fighting with weapons, they are using something much more dangerous. They are fighting with money.

Belitsakos is a short, slim and alert man who lives in the middle-class Athenian suburb of Holargos. He is also the physical and spiritual leader of a movement of businesspeople in Greece that is recruiting new members with growing speed. While Greece's government is desperately trying to combat its ballooning budget deficit by raising taxes and imposing new fees, people like Belitsakos are putting their faith in passive resistance.

The group's slogan is as simple as it is stoic: "We Won't Pay."

Working 12-Hour Days, Seven Days a WeekThis business owners' absolute refusal to pay any taxes resembles an uprising of the ownership class, rather than the working class, a rebellion of the self-employed business owners who have long been the backbone of Greek society. These are not the people who weaseled their way into Greece's oversized civil service; these are people who put their money in the private sector, working 12-hour days, seven days a week. Or so Belitsakos says.

Standing in his small store, Belitsakos makes a sweeping gesture and says that the people in his movement no longer have a choice. "The state will kill us," he says. "We're acting in self-defense." Then he starts to do the math. Over the last two years, his sales have massively shrunk as 60 of the tavernas and restaurants he used to make deliveries to have terminated their contracts with him. At the same time, the government has raised the value-added tax (VAT) twice while imposing a never-ending series of new fees. He mentions the €300 ($406) one-time fee for the self-employed, a two-percentage-point boost in the VAT, a €180 solidarity levy for the unemployed and a property tax that is "easily a few hundred euros every year."

The taxes are part of Athens' last ditch effort to avoid drifting into insolvency and to live up to the promises of austerity it delivered to the European Union. The country's vast debt means it is already reliant on the steady drip of aid it receives from a €110 billion rescue package passed last year, with a second such package likely to be passed this fall. But each payment from the fund is dependent on progress being made on the effort to clean up the country's finances.

That progress has been halting at best. In an effort to move the process forward, the government of Prime Minister Giorgios Papandreou has recently announced it intends to cut thousands of more civil servant jobs. And it introduced a controversial one-off property tax which has angered many. Several other taxes and fees have also been introduced.

Belitsakos calls them "charatzi," a word from Ottoman times that can perhaps best be translated as "loot" or "compulsory levy." The term is meant to indicate taxes levied arbitrarily and without justification, such as the tithe once paid to feudal lords. "But I can't and won't pony up. It's wrong," Belitsakos says. "Don't you understand?"

A Common Type of RevoltThe situation finally drove Belitsakos to write a letter to the head of the local tax authority in the name of his group. "We see ourselves facing a whole series of new taxes," he wrote. "We are protesting and enraged." He went on to charge that the only purpose behind the new fees was the "dispossession and impoverishment" of the Greeks and that he was now forced to resist. Briefly put, he wrote: "We won't pay."

Belitsakos says the tax official he handed the letter to was understanding and friendly. The fact that the civil servant put on a brave face might have something to do with all the TV cameras that were present. But, in a place like Greece, it is also entirely possible that the official was simply not all that surprised that someone would announce they were evading their taxes.

As well-known analyst Babis Papadimitriou puts it, the average Greek may well love his country, but he views the state apparatus as a power that one can and should plunder. Papadimitriou says that while the European average for VAT taxes that are evaded is 10 percent, the rate in Greece is roughly 30 percent. About a third of the entire economy happens off tax-authority radars.

You Can't Lose If You Don't PlayThese days, even communists, unionists and leftists are raising a public outcry against the new taxes. This week, Aleka Papariga, the general secretary of the Communist Party of Greece, said that the only way to stop the complete bankrupting of the people was for them to not pay the "charatzi." In fact, financial resistance had now become the supreme civic duty, she said.

In an interview with SPIEGEL ONLINE, Greek Economy Minister Michalis Chrysochoidis said: "The question is how we can create a feeling of solidarity. One for all and all for one, that's what it's about now." Still, Chrysochoidis would not answer his own question. For the moment, he said, it doesn't look like the government can count on many of their fellow Greeks being willing to sacrifice themselves for the interest of the state. In fact, people are abandoning the government in droves.

Belitsakos, the beverage distributor, can't and won't play a role in rescuing his country no matter what. The reason has nothing to do with patriotism. Instead, it has to do with his mistrust of the government in Athens and "international financial capitalism" and the fact that, despite having once studied mathematics, he still can't fathom the amount of money at stake here.

Belitsakos stresses that his plan is to refuse to pay any and all taxes and fees. If he has to, he says he will either go broke, to jail or both. He is convinced that there are thousands upon thousands who think just like he does and that, in the end, the Greeks will win this battle that they never chose.

Greek banks do not need to be nationalised but should receive direct support from the currency bloc's bailout fund, the head of a new EU task force set up to help rebuild the Greek economy was quoted on Friday as saying. "The banks did rock solid business until the start of the debt crisis. Therefore I see no reason for nationalisation," Horst Reichenbach told the Handelsblatt newspaper.

"It would be desirable to support the banks themselves, such as with means from the euro rescue fund (European Financial Stability Facility) EFSF or with loans from the European Investment Bank."

Reichenbach heads a 25-member team that will draft quarterly reports on the country's reform progress. It will work separately from the EU, IMF and ECB inspectors known as the troika who decide whether Athens qualifies for its quarterly bailout instalments. Reichenbach also said 70 percent of 20 billion euros of structural funds had so far not been touched and could be used to support Greek infrastructure and industry, filling a gap left by private investors who had pulled out of projects.

Reichenbach identified tourism, agriculture and renewable energy as sectors which could earn Athens money. Greek-German talks on solar energy had advanced but the industry would still need to be subsidised currently, Reichenbach said.

Asked whether German electricity consumers should support Greece's solar investments, he said: "That's exactly what German and Greek authorities are currently working on," adding that that would make necessary a change to Germany's renewable energy law and that Greece could hopefully start solar energy production next year.

European officials look set to speed up plans to recapitalise the 16 banks that came close to failing last summer’s pan-EU stress tests as part of a co-ordinated effort to reassure the markets about the strength of the 27-nation bloc’s banking sector.

A senior French official said the 16 banks regarded to be close to the threshold would now have to seek new funds immediately. Although there has been widespread speculation that French banks are seeking more capital, none is on the list. Other European officials said discussions were still under way.

The move would affect mostly mid-tier banks. Seven are Spanish, two are from Germany, Greece and Portugal, and one each from Italy, Cyprus and Slovenia. The list includes Germany’s HSH Nordbank and Banco Popolare of Italy.

When the European Banking Authority, the new pan-EU supervisor, tested 91 banks against a stressed economic scenario – including rating downgrades of sovereign debt – nine banks failed and were told to raise more capital by the end of December.

The 16 institutions that are now the focus of attention ended up with core tier one capital ratios – the key measure of financial strength – of 5 and 6 per cent. The pass mark was 5 per cent. The EBA had given those banks until April 2012 to implement plans to shore up their capital buffers.

While the banks are expected to turn to private markets first, officials said that state aid may be required. The French government appears to favour using the new €440 billion rescue fund, known as the European financial stability fund, but other member states are likely to argue for national action.

Joaquín Almunia, the EU competition commissioner, last week extended the special regime for state aid to banks that was set up in the 2008 crisis to allow governments to pump soft loans and guarantees into failing banks.

The EU internal markets commissioner, Michel Barnier, said the 16 banks that nearly failed the stress tests "are judged to be fragile and must also be strengthened further. We want the recapitalisation for these banks to be by private means. The era of bailing out banks must end. But I cannot of course exclude the possibility that some of the above banks will require state aid."

An EBA spokeswoman said "The EBA is working with [national supervisors] to ensure a co-ordinated approach in identifying and addressing such capital needs ... [and] will be reviewing the actions undertaken by those banks.f

Banks that did better in the stress tests but are not yet in compliance with the tough new capital requirements agreed last winter by global regulators will be expected to accelerate their "march towards the Basel III ratios", the French official said. The Basel III agreement gives banks until 2019 to be fully compliant.

On Friday, rating agency Moody’s Investors Service downgraded the rating of Piraeus Bank along with five other Greek banks including National Bank of Greece and Alpha Bank by two notches from B3 to Caa2. It also cut the ratings of two other Greek lenders from B1 to B3. Moody’s cited Greece’s struggling economy and declining deposits as among the reasons for the move.

Europe's debt crisis risks escalating out of control as the world economy slides towards a double-dip slump with few shock absorbers left to limit the damage.

Key indicators of credit stress have reached the danger levels seen before the Lehman Brothers failure three years ago, with Markit's iTraxx Crossover index – or "fear gauge" – of corporate bonds surging 56 basis points to 857 on Thursday. Societe Generale led a further rout of bank shares, crashing 9pc in Paris on concern that it might need recapitalisation to cope with losses on Italian and Spanish debt.

The yield spread between Italian 10-year bonds and Bunds reached a fresh record of 408 basis points before the European Central Bank (ECB) intervened in late trading. It is near the level at which LCH.Clearnet raises margin requirements, the trigger that forced Greece, Portugal and Ireland to request bail-outs.

Global investors appear shaken by the refusal of the US Federal Reserve to come to the rescue yet again with quantitative easing (QE3) even though it was never likely the bank would launch fresh stimulus with core inflation running near 2pc or in the face of protests from Capitol Hill.

The global flight from risk has hit Europe hardest. Peter Possing Andersen from Danske Bank said Europe’s authorities are running out of time. "The financial markets have lost faith in the current policies and the economy is on the verge of a recession. Radical action is needed to short-circuit the negative spiral," he said.

"Segments of the financial markets are dysfunctional and access to credit is being shut down. European policymakers must take imminent and bold measures. Until this happens, the market will grind slowly but surely towards disaster. The current policy of austerity risks killing the already-fragile recovery and is making a bad situation worse in terms of debt dynamics," he said.

Mr Andersen said Greece needs greater debt relief to break the "vicious circle", while the ECB should step in with "unlimited" bond purchases from countries such as Italy that are essentially solvent.

Ominously, the PMI data for China is flashing contraction warnings for the third month, dropping further than it did during the depths of the Great Contraction, suggesting the loan curbs are starting to bite. "We are in a fresh cyclical downturn within a structural slump/depression. We need global co-ordinated monetary action and the ECB must cut rates by 50 points. It made a terrible mistake by raising rates in July," Mr Roberts said.

The IMF has slashed its growth forecast for Italy to a stall speed of just 0.3pc in 2012, a level that risks havoc with debt dynamics. The country must raise €260bn by late next year. Each 100-point rise in borrowing costs increases the budget deficit by €2.5bn. The IMF warned that emerging markets are nearing the buffers of credit growth and are losing their fiscal room for manoeuvre. It said China’s domestic loans have risen to 173pc of GDP, "well above" the safety level.

The IMF fears "significant" losses on $1.7 trillion of local government debt, raising the risk Beijing may need to rescue the system. "The consequences could be a substantial worsening of China’s public debt metrics and a narrower scope for future fiscal stimulus," it said. China cannot safely respond to a second global shock by opening the floodgates of cheap credit again.

Professor Giuseppe Ragusa from Luiss Guido University in Rome said the ECB has the power to halt the eurozone’s escalating crisis by pledging to buy up €2 trillion of bonds. "They would not have to buy the debt. The promise would be enough," he said. Such bold action appears unlikely. The ECB has intervened hesitantly over the past six weeks, without the overwhelming force needed to convince markets that it will back-stop Italy’s €1.8 trillion debt – the world’s third largest.

The bank is constrained since the policy is vehemently opposed by the Bundesbank and by German president Christian Wulff, who has accused the ECB of breaching the EU treaty law. David Owen from Jefferies Fixed Income said the Bundesbank increased its balance sheet by €50bn in August alone to help shore up the Eurosystem. It has lifted its liquidity provision eightfold to €421bn since the crisis began, almost as much as the ECB itself.

On Thursday IMF managing director Christine Lagarde said the ECB must continue to provide "solid, reliable" funding for euro-area banks and economies as parliaments in the region pass measures into law to fight the region’s debt crisis. The ECB "plays and can play and I hope will continue to play a critical role," she said.

There are clearly limits to how far this policy can be pushed without a treaty change. Otherwise it amounts to fiscal union by the back door. The task of purchasing bonds and recapitalising banks must fall to the EU’s bail-out fund, but it will not be ready until ratified by all national parliaments later this year. Europe faces a tense Autumn.

• Bank of America, Citigroup and Wells Fargo downgraded in US• S&P cuts ratings on Italy's Intesa Sanpaolo and Mediobanca• IMF warns time is running out to solve financial crisis

Banks on both sides of the Atlantic have been downgraded by ratings agencies just hours after the International Monetary Fund warned time was running out to tackle weaknesses in the global financial system.

The Washington-based IMF, which said that the exposure of European banks to debt in the weakest parts of the eurozone had ballooned to €300bn since last year, used its half-yearly global financial stability report (GFSR) to warn that there had been a substantial increase in risks to stability over the past few months. It said the sharp rise in market turmoil over the summer had been caused by investors losing patience with the inadequacy of reforms since the start of the crisis more than four years ago.

America's biggest bank, Bank of America, was downgraded two notches by the Moody's on concerns that BoA – which rescued troubled rivals such as Countrywide and Merrill Lynch during the 2008 banking crisis – might not be bailed out by the US government if it ran into difficulty.

"Moody's believes that the government is likely to continue to provide some level of support to systemically important financial institutions. However, it is also more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute," the agency said. The analysis was disputed by Bank of America, which pointed out its capital strength and holdings of liquid assets.

Moody's also downgraded Citigroup and Wells Fargo in the US, while Italian banks Intesa Sanpaolo and Mediobanca were downgraded by Standard & Poor's, which had downgraded Italian government debt for the first time in five years on Tuesday.

José Viñals, the IMF's financial counsellor, told journalists in Washington DC that risks were increasing in the financial system. "Since our previous report, financial stability risks have increased substantially – reversing some of the progress that had been made over the previous three years. So we are back in the danger zone,"

Viñals said as he cited a trio of shocks to the financial system: unequivocal signs of a broader global economic slowdown, turbulence in the euro area and the credit downgrade in the US. "This has thrown us into a crisis of confidence, which is being driven by three main factors: weak growth, weak balance sheets and weak politics," he said.

The Fund sought to quantify the financial strain put on Europe's banks by the sovereign debt crisis since 2010. "During this period, banks have had to withstand an increase in credit risk coming from high-spread euro area sovereigns that we estimate amounts to about €200bn [£175bn]. If we include exposures to other banks in high-spread euro area countries, the total estimated spillover increases to €300bn," Viñals said.

He added it was still possible to find a way through to sustained recovery. "But for this, we need to act now; we need to act boldly; and we need to act in a globally co-ordinated manner. There is a way; now we need the political will."

Financial reform needed nowThe IMF said that the crisis had moved into a new, more political phase and that, in the euro area, important steps had been taken to address current problems – but political differences within economies undergoing austerity programmes and among countries providing support had impeded achievement of a lasting solution. "Meanwhile, the US is faced with growing doubts over the ability of the political process to achieve a necessary consensus regarding medium-term fiscal adjustment, which is critically important for global stability," the IMF added.

The Fund's report said an extended period of low interest rates could carry longer-term threats to the financial system, although cheap borrowing costs were still needed today given the state of the global economy: "Low rates are diverting credit creation into more opaque channels, such as the shadow banking system. These conditions increase the potential for a sharper and more powerful turn in the credit cycle, risking greater deterioration in asset quality in the event of new shocks."

The IMF said the financial reform agenda needed to be completed as soon as possible and implemented internationally in a consistent manner. This includes the finalisation of the Basel 3 agreement governing capital requirements of banks, the treatment of systemically important financial institutions, and addressing the challenges posed by the shadow banking system. "For the first time since the October 2008 GFSR, risks to global financial stability have increased, signalling a partial reversal in progress made over the past three years," it said.

"Recent market turmoil suggests that investors are losing patience with the lack of momentum on financial repair and reform. Policymakers need to accelerate actions to address long-standing financial weaknesses to ensure stability."

The report warned that four years of financial crisis had left governments saddled with onerous debt burdens and sharply higher funding needs. "Lower tax revenue, weaker growth prospects, and large-scale support for ailing financial institutions have driven public finances into precarious territory.

"The latest bout of market volatility has reminded some investors of the collapse in asset prices following the September 2008 Lehman Brothers bankruptcy. Although the current reaction has not been as severe or as widespread as it was after that event, risk perceptions are greater for European banks and sovereigns. There is a risk of a further deterioration if appropriate policies are not implemented," the report said.

This was supposed to be the month that European banks went back to debt markets to refill their coffers. It is not working out that way.

On the contrary, debt issuance by banks has slowed to a trickle at the same time that short-term interbank lending is drying up. The financing drought raises questions about whether banks will have enough money to refinance their own long-term debt and still meet demand for loans.

Less lending could further depress growth in Europe, which is already teetering on the edge of recession. "The euro zone economy has stalled and as the recent financial stresses feed into the real economy, it is likely to get worse still," analysts at HSBC wrote in a note to clients on Thursday. A release of data showed that pessimism among manufacturers had reached levels not seen since the 2009 recession.

The fund-raising problems at banks stem directly from the sovereign debt crisis, which is having an insidious effect in a few ways. Not surprisingly, investors are wary of banks that could suffer losses if Greece defaults on its debt, as seems increasingly likely. But the crisis has also raised doubts about the underlying health of the European banking system and whether governments would be able to step in to rescue their banks if there were another financial catastrophe.

"Banks certainly do not have enough capital in relation to their government bonds," said Dorothea Schäfer, an expert in financial markets at the German Institute for Economic Research in Berlin. She has calculated that the 10 largest German banks would need to raise 127 billion euros ($171 billion) to bring their capital reserves to 5 percent of gross assets — a level she considers barely adequate.

"That could substantially heighten trust, I would even say would bring it back," Ms. Schäfer said. But raising that additional capital would be politically perilous because it would probably require another taxpayer-financed bailout. Many of the banks that need capital are already owned by government entities and, because they are not listed on stock markets, cannot sell shares to increase their capital.

The banking industry is also fighting requirements that would require them to keep more ample reserves, which would cut into profits. According to the standard used by regulators, banks are much better capitalized than they were in 2008. Banks in Europe had so-called core Tier 1 capital — the most durable form of reserves — equal to 10.6 percent of their assets at the end of June, according to calculations by analysts at Nomura. That compares with a previous low of 6.4 percent.

For that reason, some analysts say that the alarm about bank financing is overblown. "I don’t think we’re overly concerned yet," said Jon Peace, a banking analyst at Nomura. But he added, "Definitely we are watching the data week by week." He said that banks in Northern Europe, where government debt is less of a problem, were having an easier time raising money.

Ms. Schäfer said, though, that current measures of capital reserves were "useless" because they did not capture the risk from holdings of government bonds, which the International Monetary Fund this week estimated at 300 billion euros for European banks.

Regulations still treat European government debt as if it were risk-free, though it obviously is not. As a result, banks are not required to set aside extra capital to cushion against a government default. And holdings of government bonds are excluded from the calculation of capital ratios.

Sophisticated investors are aware of these shortcomings, which helps explain the drop in debt issuance recently. Since July, sales of bonds and other debt instruments have plummeted 85 percent compared with sales in the period a year earlier, according to Dealogic, a data provider in London.

"A lot of money has been lost," said Kenneth Rogoff, a Harvard professor and former chief economist at the I.M.F., during an appearance in Frankfurt on Thursday. Greek default is inevitable, said Mr. Rogoff, author of a history of sovereign defaults. "Banks and governments may not have put it in their books," he said of the losses, "but it’s gone."

Though September is not yet over, it is clear that issuance will be well below levels from earlier this year, denying banks one of their main sources of financing. Through Thursday, Dealogic recorded a meager 2.6 billion euros in debt issues. That compares with 6.2 billion euros for all of August and 65.5 billion euros in January, the most active month for bond issues this year.

The plunge in bond issues by banks is happening at the same time that European financial institutions are having trouble borrowing from one another at reasonable rates on the open market. As a result, bank borrowing from the European Central Bank — the lender of last resort for euro zone banks — surged again this week.

In another measure of banks’ suspicion of one another’s creditworthiness, a closely watched measure of interbank stress, known as the Euribor-OIS spread, rose to its highest level since March 2009, according to Bloomberg data. The cost for European banks for financing in dollars rose to near the highest level in almost three years.

It is the nature of the interbank market that just a whisper of doubt about a bank’s solvency can be enough to keep lenders away, and lead them to the central bank loan window. "Nobody really wants to lend to anybody where there is the slightest doubt," said one banker in Frankfurt involved in fixed-income markets, who spoke on the condition of anonymity to avoid offending clients. "Any counterparty where the market suspects underlying problems will have trouble finding liquidity from sources other than the E.C.B."

In what investors take as a particularly bad sign, a small number of banks have also been borrowing emergency dollars from the central bank. That raises questions about whether some large European banks are having trouble refinancing assets in the United States, a problem disturbingly reminiscent of the 2008 financial crisis.

Shares of French banks have been hit particularly hard because of perceptions that they are not prepared for potential losses on their holdings of Greek debt. Last week, the French bank BNP Paribas denied a report in The Wall Street Journal that it had run into problems obtaining dollars on the market. The central bank closely guards the identity of borrowers.

Regulations allow banks to ignore market movements in the prices of sovereign bonds, classifying the bonds as long-term holdings and pretending that governments will always pay the promised interest and principal. But those bonds may still represent a continuing liability to banks, and another source of market nervousness.

Many banks may have borrowed money in the short term to buy the bonds in the first place — for example, taking out a three-month loan to buy a bond that matures in 10 years. This is a common practice known as maturity transformation. In good times, banks can profit from the difference between short-term and long-term interest rates. But it means that banks must continually refinance the original purchase price of the bond. Without financing, or enough capital to absorb the loss, a bank can go broke.

Those bonds are worth less today in another way. Government debt is the most common asset banks use as a collateral to obtain loans in the so-called repo market, which is another crucial source of financing. But lenders have become less willing to accept European bonds except at a discount to their face value, if at all.

Use of Greek, Portuguese and Irish bonds as collateral in the repo market fell by half in the second half of 2010 compared with the amount in the period a year earlier, as markets imposed steep discounts, according to a study by Michael Davies and Tim Ng at the Bank for International Settlements in Basel, Switzerland.

Adding yet another layer of uncertainty, the debt crisis has undermined the longstanding assumption that governments will step in if their domestic banks get in trouble. Lenders have begun to wonder if countries like Italy — which already has one of the world’s highest debt burdens as a percentage of its economy — would even be able to.

In the B.I.S. study, which was published this week, Mr. Davies and Mr. Ng warned: "Sovereign credit risk and its implications now pose a significant and urgent challenge to banks."

European banks have already received 420 billion euros in funds to help recapitalize and are in a much better shape than three years ago, the European Commission said on Friday.

"The recapitalization of European banks is something that is ongoing, it is something that is already happening," Commission spokesman Olivier Bailly told a regular briefing. "It has been going on since 2008, it is worthwhile recalling that. The amount for recapitalization of European banks is 420 billion (euros)," he said.

Eight banks failed this summer's pan-EU banking stress tests and another 16 were considered as fragile. Investors are concerned about European banks' ability to handle a possible Greek default and the likely wider contagion.

Bailly said it was for each bank to come forward with a plan if it needed to increase its capital, and for member states to assess those and decide whether markets or governments needed to help in recapitalizing. "There is no big European plan to recapitalize banks in Europe," he told the briefing.

Conventional wisdom may now be only half right when it comes to solving Europe’s mess. Fixing the sovereign debt problem is still necessary, but it may no longer be sufficient. Europe must also move quickly to stabilise the banks at its core in ways that go far beyond what the European Central Bank announced on Wednesday. As senior BNP Paribas executives prepare to tour the Middle East in an attempt to raise fresh funds and shore up confidence, other banks must also show greater urgency and seriousness in dealing with capital and asset quality shortfalls.

Much of the discussion on the crisis is based on the assumption that sovereign debt is both the problem and the solution. Initially, this was correct. The combination of too much debt and too little growth pushed the most vulnerable countries (Greece, Ireland and Portugal) into a classic debt trap. Timid policy responses then fuelled contagion waves that undermined other sectors.

The problem today has become much more complicated. In addition to being on the receiving end, some of these sectors have become standalone sources of regional dislocations.

Italy is, of course, the most visible example. Interest rates on what is the third largest government debt market in the world remain stubbornly high in spite of persistent market intervention by the ECB. Wednesday’s rating cuts of some of the country’s leading banks, following Standard & Poor’s downgrade of the country’s sovereign debt on Monday, complicates matters.

Yet, as notable as this is, it is not the most immediately threatening issue for a global economy that, in the words of Christine Lagarde, IMF managing director, has entered "a dangerous phase". The rapidly burning fuse is in the European banking system, particularly in France, and Europe is getting very close to yet another tipping point.

The facts are striking and worrisome. Private institutions around the world, and even some public ones, have sharply reduced short-term lending to French banks. Credit markets now put their risk of default at levels indicative of a BB rating, which is fundamentally inconsistent with sound banking operations. Bank equity now trades at a 50 per cent discount to tangible book value on average. To make things worse, the ratio of market capital to total assets has fallen to 1 – 1.5 per cent (compared with six to eight per cent for healthier banks).

These are all signs of an institutional run on French banks. If it persists, the banks would have no choice but to delever their balance sheets in a very drastic and disorderly fashion. Retail depositors would get edgy and be tempted to follow trading and institutional clients through the exit doors. Europe would thus be thrown into a full-blown banking crisis that aggravates the sovereign debt trap, renders certain another economic recession, and significantly worsens the outlook for the global economy.

So far neither the authorities nor the banks have done, or are doing enough to stop – let alone reverse – this trend. While the ECB has stepped in to offset the liquidity crunch, including by relaxing collateral requirements to make it easier for banks to access the central bank’s repo window, capital cushions and asset quality remain unaddressed. As a result, Europe is on the verge of losing control of orderly solutions to its debt crisis.

To counter this, fiscal authorities and banks must work with the ECB on three immediate, simultaneous and drastic measures. They must inject capital through public-private partnerships, including through Tarp-like mechanisms, present a realistic assessment of the asset side of the balance sheet and enhance depositor protection. Greater burden sharing with the private sector may also prove necessary.

Through the bitter experience of the last two years, Europe now understands that a sovereign debt problem is difficult to solve. It must now realise that the challenges and costs to society multiply astronomically when this is accompanied with a banking crisis; and it must act accordingly.

Chinese property stocks suffered double-digit declines amid growing fears that developers are losing access to funding and will be forced to slash prices. The trigger for Thursday’s tumble was a Reuters report that the Chinese banking regulator had ordered trust companies to assess their risks from lending to Greentown, the largest builder in the eastern province of Zhejiang.

The news was "another sign that the government is cutting the funding sources for developers", Credit Suisse analysts told investors on Thursday. Greentown’s Hong Kong-listed shares tumbled 16.2 per cent, though the group said it was unaware of any investigation by the China Banking Regulatory Commission.

Other Hong Kong-listed developers that use trust financing include Agile Property, Evergrande, KWG and Shimao, according to Credit Suisse. All four groups fell by more than 10 per cent, while the wider market dropped 4.9 per cent. Chinese property stocks have been in the grip of a savage bear market for more than a year as investors anticipated the effects of the government’s crackdown on property speculation and soaring prices.

"Initially, people were worrying about earnings. What happened [on Thursday] is that people started to worry about balance sheet problems as well as cash flow and funding," said Agnes Deng, head of China equities at Baring Asset Management.

Over the last year, Chinese regulators have issued numerous public warnings and direct orders to the state-owned banks to reduce their exposure to real estate and rein in the flood of credit that has gone to the sector in the last two years.

As a result, the developers turned to other sources of funding, raising more than $6bn by selling bonds to international investors. Since June, however, all but the top state-owned developers have been shut out of international debt markets as bond prices have plunged, leaving China’s nascent trust company sector as the lender of last resort.

In the past few weeks, property prices have started to dip in many cities, after a sharp decline in sales volumes. In Shanghai, once one of China’s frothiest property markets, transaction volumes have slumped more than 50 per cent from a year ago, according to China Index Academy, a data provider. As a result, developers have cut prices by up to 10 per cent on nearly 150 residential projects in Shanghai, Soufun, the country’s top real estate website, said this week.

"The funding crisis will force the developers to cut prices even more," said Gillem Tulloch, head of Hong Kong-based research house Forensic Asia. "The bubble is in the process of deflating."

A moderate fall in prices would please the government. Beijing wants to avoid repeating what it sees as Japan’s mistake in letting real estate prices soar during the 1980s, paving the way for a stagnant decade after they crashed. It is also worried about social fallout, with unaffordable housing one of the chief complaints of urban citizens.

However, property construction is central to the Chinese economy as well as global demand for commodities such as copper and steel, so a full-blown crash is the last thing Beijing wants.

Fallout from the rescue of one of the country’s biggest lenders highlights oversight concerns

On a snowy Friday evening in late March, Andrei Borodin received a call as he flew out of Moscow on a private jet. Then president of Bank of Moscow, Russia’s fifth-biggest, he found himself under mounting pressure as VTB, the state-controlled lender that is Russia’s second biggest, tried to take over his bank. Just hours earlier, the government’s budget watchdog had called for his suspension while it audited what it believed were "dubious" loans to entities re?lated to Bank of Moscow.

Police were also investigating him separately over a property loan the bank had made. "Someone called me and said that on Monday the Russian police will officially accuse me of abusing my authority," says Mr Borodin. He never flew back; today he is in exile in an undisclosed location. Within months, Bank of Moscow – a quasi-sovereign lender with shareholders including Goldman Sachs and Credit Suisse – was at the centre of one of the nation’s largest corporate scandals of recent years.

To fill an alleged hole in its accounts far bigger than previously suspected, the government agreed in July to extend its largest-ever bank bail-out. At Rbs395bn, then worth $14bn, it was equivalent to 1 per cent of economic output.

For a while the affair seemed to threaten the stability of VTB, a national banking champion whose assets had mushroomed from $4bn to $120bn in just seven years. The affair has become steeped in controversy because of troubling questions it has raised about bank oversight in Russia – but also because of the central actors’ sharply conflicting accounts.

Andrei Kostin, VTB chief executive, says that after his institution bought an initial 46.5 per cent of Bank of Moscow in February, it found questionable loans worth billions of dollars to businesses related to Bank of Moscow’s senior managers. The bail-out, he says, averted what could have been Russia’s version of the collapse of Lehman Brothers.

Mr Borodin’s camp claims the affair is yet another example of the grabbing of assets by Kremlin-connected businesses seen so often in recent years. They say the hole in Bank of Moscow’s accounts was "artificially created" as a pretext for the bail-out – to benefit VTB, or even cover problems with VTB’s own balance sheet.Each side vehemently denies the other’s allegations.

The reality may contain elements of both. But either version is unsettling for investors. If VTB is right, how could Bank of Moscow develop such a hole in its books under the noses of regulators – and how many other Russian banks might be hiding similar problems? Mr Borodin’s allegations, on the other hand, highlight concerns about the murky relationship between the state and state-controlled businesses – and also, potentially, about VTB’s finances.

"[This affair] raises big institutional issues about Russia and emerging markets as a whole," says Timothy Ash of Royal Bank of Scotland. "The balance sheets might look good but no one really knows what’s going on behind them."

It all began last autumn, following the sacking by President Dmitry Med?vedev of Yuri Luzhkov as Moscow mayor. Mr Luzhkov, of whom Mr Borodin is a close ally, ran the capital virtually as a personal fiefdom for 18 years. In 1995, he ordered Mr Borodin, a young western-trained banker and one of his advisers, to set up a bank controlled by the city government. By last year, Bank of Moscow was one of the country’s leading lenders, with Mr Borodin and a business partner owning 20 per cent, and the city still holding 46.5 per cent.

Mr Borodin says he was told at a meeting late last year with Sergei Sobyanin, the new mayor, that it had been decided to sell the city’s stake to VTB. It was suggested Mr Borodin should sell his stake, too, and step down as president.

He believes the decision was prompted by the Kremlin. Mr Sobyanin had served as chief of staff to prime minister Vladimir Putin. At about that time, Mr Borodin found himself the subject of a criminal probe by prosecutors – involving tactics such as late-night raids on his home – into a Rbs13bn loan Bank of Moscow made in 2009 to buy land from Mr Luzhkov’s billionaire property developer wife, Yelena Baturina, at what prosecutors allege was an inflated price. Mr Borodin and Ms Baturina deny any wrongdoing.

Despite the pressure, Mr Borodin says he attempted to find alternative buyers for his stake, insisting a VTB deal made no commercial sense. Non-state banks complained the stake was being sold without an open tender. However, VTB bought the city’s stake for $3.7bn in February.

Regulation: ‘The balance sheets are not transparent enough’When state-owned VTB, Russia’s second-biggest bank, faced a wave of potential non-payments on billions of dollars owed by the country’s largest companies during the financial crisis, its ability to restructure and roll over many of the loans prevented a meltdown across the domestic economy, writes Catherine Belton.

To aid such flexibility, the Russian government pumped in Rbs180bn (then $5.6bn) in capital and extended a Rbs200bn subordinated loan in 2009. But with the crisis over, and bad loans peaking early last year at a reported 10 per cent, VTB’s acquisition of Bank of Moscow is casting a new spotlight on lending practices at Russian state banks.

The $14bn bailout of Bank of Moscow in July sent jitters through the investor community about the quality of oversight and reporting at state-owned institutions. "The fact that some state banks, such as VTB, Sberbank, Gazprombank and Bank of Moscow, appear to have been in a comfort zone is very worrying," says Richard Hainsworth, head of RusRating, an independent rating agency.

Although these lenders produce accounts to international standards, the central bank faces particular difficulties with non-performing loans. Oversight in Russia is carried out according to domestic accounting standards, which do not consolidate assets held in different jurisdictions. This could give banks leeway to hide bad loans by parking them offshore.

"The central bank is not capable of identifying non-performing loans fully. The balance sheets are not transparent enough," says Mikhail Dmitriev, head of the Centre for Strategic Research, a government-connected think-tank.

"There is a big agenda for the central bank in improving accounting standards and enforcing consolidated international financial standard reporting."

According to one senior western economist: "The level of non-performing loans across the banking sector is higher than the official one but [by] how much is impossible to say – because we just don’t know the data."

The other problem the Russian central bank faces is that it lacks discretion to crack down on suspicious activity. Current legislation gives it the power to impose sanctions only on proved breaches of banking law. It is pushing for legislative change that would allow it to probe more deeply into suspected related-party lending and impose sanctions on bank managers and owners found to be faking accounts.

In the wake of recent scandals, the pressure is on for it to finally pass these laws.

When the Financial Times spoke to Mr Kostin that month on the 58th floor of VTB headquarters in Moscow’s new financial district, he was buoyant. "In the next month, we will regulate the entire situation [with Bank of Moscow]," he said. The two sides continued to clash over price. But days before he fled Russia, Mr Borodin sold his stake to a Kremlin-connected businessman he understood to be acting as an intermediary for VTB.

. . .

The way Mr Kostin tells it now, things soon started to go sour. Only after a court order in April ousted Mr Borodin as Bank of Moscow’s president – weeks after he fled the country – was it able to get full operational control.

Mr Kostin claims VTB then un?earthed Rbs366bn of loans by Bank of Moscow it believes were related to Mr Borodin’s team. "It can’t happen in any civilised state that a manager of [a] bank can invest more than 40 per cent of the loan portfolio in his own assets," he told the FT. "The necessary bank procedures were violated."

Some Rbs116bn, he says, was secured by a "not bad" level of collateral. Another Rbs100bn was lent to enterprises linked to Mr Borodin and his management team, such as a timber company, wine and spirit makers and city construction projects. Mr Kostin believes 70 to 80 per cent of the value of these loans can be recovered.

But Rbs150bn was, he says, lent in very small volumes, often without collateral, to mainly Cyprus-based offshore companies. Together with Russia’s central bank, which carried out its own subsequent probe that supported VTB’s findings, Mr Kostin claims these appear to be related to Mr Borodin. "We believe that about Rbs70bn of this was just lent to pay interest rates on loans already extended ... This was a pyramid scheme," Mr Kostin says.

As VTB struggled to get a grip on its acquisition’s finances, delays in publishing Bank of Moscow’s audited 2010 results threatened to put it in default on $2bn in foreign currency bonds. Analysts began to question whether VTB’s own $8bn in foreign currency bonds could also be in cross-default as a result. In July, the central bank announced the huge bail-out.

"I think [VTB executives] screamed blue murder," says one banking insider. "It could have put into danger the whole of VTB, [with] a knock-on impact on the Russian government." Mr Kostin says the authorities had to act. "The decision was taken that Bank of Moscow has the status of too big to fail," he says, citing its 4.5m depositors, Rbs200bn debt to the state, and $3bn to foreign creditors.

. . .

Yet many questions remain. Though Alexei Kudrin, finance minister, has called for a criminal probe, none has officially been launched against Mr Borodin or other former Bank of Moscow managers over its lending practices. An international arrest warrant, issued for Mr Borodin two months after he left Russia, relates to last year’s property loan investigation, not the wrongdoing VTB alleges.

Mr Borodin and his team of lawyers and public relations advisers say it would have been impossible for Bank of Moscow to engage in the activities VTB alleges. All loans above $10m went through a credit committee working to international standards. Five central bank employees, more?over, had worked inside Bank of Moscow ever since it received a small amount of state support in the 2008 financial crisis.

A spokesperson for Mr Borodin said he could not comment on specific allegations on Bank of Moscow’s lending because neither VTB nor the central bank had ever presented any evidence. But his lawyers have questioned why a $14bn bail-out was needed when only a fraction of that in loans is alleged to be totally unrecoverable, while the rest, even according to Mr Kostin, can be restored.

Mr Borodin has spoken on behalf of owners of assets that received Rbs217bn in loans from the bank, insisting in an open letter to Mr Kostin in May that the value of the collateral behind these loans is Rbs260bn. People close to the former banker suggested the value of this collateral was deliberately undervalued to "create" the balance sheet hole, and grant the VTB and its business partners access to these assets at a rock-bottom price.

"The bail-out was not to Bank of Moscow but to the shareholders of the bank, which is clear evidence that the problems of Bank of Moscow are artificial and in fact the state aid is for someone else," Mr Borodin told the FT. "I set up this bank, I was chairman for 16 years. What would be the reason for me to be cheating, practically, my own business?" he adds.

VTB says it has no interest in any assets held as collateral for the big problem loans – it just wants the loans repaid. It adds that the size of the bail-out was justified by the need to increase provisioning against potential losses.

Regardless of the value of the collateral, however, the Rbs366bn Mr Kostin claims was lent to companies related to the bank would far exceed levels of risk concentration permitted by the central bank. That raises questions about why the central bank saw no risks until this summer, though global rating agencies such as Fitch identified Rbs116bn of loans as presenting a potential "succession risk" after Mr Luzhkov left office.

Alexei Simanovsky, head of the central bank’s oversight department, told the FT that earlier annual probes of Bank of Moscow’s balance sheet had been selective and found no evidence of wrongdoing. His team had uncovered only a limited volume of small loans to offshore businesses that did not appear connected to Mr Borodin.

"We were not able to guess that apart from this handful there were dozens of others and they were all related." "The management of the bank had a good image. It just did not enter your head," he says.

But Richard Hainsworth, of the RusRating rating agency, accuses the central bank of "poor auditing". Since the 2006 murder of Andrei Kozlov, a deputy central banker who crusaded for greater transparency, the regulator has become "a toothless tiger", he says. Officials let banks slip through loopholes as long as their activity conforms to the letter of the law.

Such apparently lax oversight powers are giving investors considerable pause. But it was the size of the bail-out that shocked them most. "This raises much broader questions about whether lending practices are any tougher at other state banks," said one senior economist, speaking on condition of anonymity.

As Russia struggles to return to the growth rates it enjoyed before the global recession, questions over potential systemic risks hidden in its opaque banking system are the last thing the country needs.

Italian Prime Minister Silvio Berlusconi refuses to recognize that his country is in trouble. Vast debt, sluggish growth and rising borrowing rates indicate that Rome too may be infected by the euro-zone debt crisis. But the EU has few tools at its disposal to get Italy to take action.

After ratings agency Standard & Poor's downgraded Italy's credit rating a notch on Monday night, Prime Minister Silvio Berlusconi immediately went on the offensive. The appraisal of the country's economic state seemed to be "dictated more by media reports than reality," he said. The Italian government is already balancing the budget, he added.

In reality Berlusconi has only just begun working on savings measures -- a reaction to massive pressure and repeated market fluctuations. His behavior demonstrates the leader's intention to cling to the populist style of governing until the bitter end. But the powerful media mogul's stance also betrays the limits of European Union influence on its indebted member states -- at least those that haven't yet been forced to accept a bailout.

That Italy might ultimately need financial support, to be sure, can't be ruled out. Certainly, in contrast to Greece and Portugal, the country has a powerful economy and still counts among the world's biggest industrial nations. But Italy's national debt, some 120 percent of its yearly economic output, is surpassed only by Greece within the EU.

Moreover, the Italian economy has grown only weakly in recent years, meaning that there is too little tax revenue to reduce its debt. And financing that debt has become more expensive as interest rates rise. In August 2010, interest rates on Italian government bonds were 3.8 percent. One year later, that number had jumped to 5.3 percent.

'International Laughingstock'Large debts, weak growth and rising interest rates: These are the same symptoms exhibited by the three euro-zone countries that have already required financial assistance from their currency union partners. Saving Italy, however, would be vastly more difficult. Its debt is simply too great.

The danger has long been recognized in Europe. But as long as Italy has not drawn on financial assistance, EU influence remains restricted. Even after S&P's credit downgrade and Berlusconi's aggressive reaction, European leaders can only make appeals. A spokesperson for European Economic Commissioner Olli Rehn urged Italy to immediately enact its savings resolutions. Gerda Hasselfeldt, head of the state parliamentary group for Bavaria's conservative Christian Social Union (CSU), called the downgrade a "good and necessary incentive." Peter Altmaier, a leading member of Chancellor Angela Merkel's Christian Democrats , said: "The case of Italy shows that we're not just talking about Greece."

As slightly less diplomatic analysis came from the president of Confindustria, an organization representing Italian manufacturing and service companies. "We are sick and tired of being the international laughingstock," Emma Marcegaglia said. The government must either "enact quick, serious and also unpopular reforms" or "pack their bags," she said.

Her harsh statement shows the pent up frustration over Berlusconi's crisis management. For a long time the prime minister saw no reason to act at all. When the government passed austerity measures worth some €47 billion in July, Berlusconi boasted about how harmless it was. "We have avoided every drastic measure taken by other European countries," he said. "The Italians should build us a monument."

Wavering by BerlusconiSuch statements were not exactly designed to win back the faith of investors. If anything, market pressure only increased, forcing Rome to put together a second package of belt-tightening measures worth €45 billion. But even that proved hardly reassuring after Berlusconi sought to water-down the package. He attempted to remove a wealth tax from the package only to backtrack just days later.

Such wavering by Berlusconi can hardly be influenced from abroad. Imposing serious savings measures on Rome would only become possible should Italy be forced to apply for financial assistance.Without a formal means to apply pressure on Italy -- such as might be provided by a European economic government, for example -- the EU can only apply backroom pressure. This is the route the European Central Bank (ECB) reportedly took by sending a confidential letter to Berlusconi with a list of demands for concrete reforms.

Fulfilment of those demands could be seen as a kind of reciprocity. The ECB has long been buying significant quantities of Italian sovereign bonds in order to keep Rome's borrowing costs as low as possible. Such purchases are controversial within the ECB, with both former German central bank head Axel Weber and chief ECB economist Jürgen Stark having resigned recently, allegedly in protest at the practice. The new Bundesbank head, Jens Weidmann, recently criticized the purchases in an interview with SPIEGEL .

Ongoing Bond PurchasesBut the ECB appeal apparently was not enough to convince Berlusconi of the precariousness of the situation. "Unfortunately, it takes much too long for governments to recognize the seriousness of the situation and to take appropriate action," Ulrich Kater, chief economist at Dekabank, told the business daily Handelsblatt on Tuesday.

Indeed, it would appear that concern about Italy's current debt situation is such that the ECB can no longer tamp it down with bond purchases. Jörg Krämer, chief economist of Commerzbank, pointed out to the paper that the risk premium on Italian bonds is continuing to climb even though the ECB "is aggressively buying state bonds and thus effectively financing state expenditures with the printing press." Europe's central bankers, it would seem, do not see an alternative to the strategy. On Tuesday, traders say, the ECB once ag

Just when markets were focused on the risks of a Greek default and the possibility of contagion to other countries, Spain’s central bank reported this week that things were getting worse for that country’s banks — but not because they held a lot of Greek debt or bonds issued by other troubled European economies. The problem, instead, is the same old one. With Spain’s economy weak and home prices falling, bad loans are growing. And the central bank thinks things are getting worse.

In a surprisingly frank presentation to investors in London on Tuesday, José María Roldán, the Bank of Spain’s director general of banking regulation, said that Spanish land prices had fallen about 30 percent from the 2007 peak, adjusted for inflation, and that home prices were off about 22 percent. "In both cases, we expect further corrections in the years to come," he said. For land prices, he said, the bank’s "baseline scenario" was that prices would fall to little more than half of the peak level. The "adverse scenario" indicated that the decline could be significantly worse.

That was a significant change from a presentation he made in February. Then, with home prices down about 18 percent from the peak, he argued that the decline was similar to past cyclical downturns and that prices were likely to begin rising soon.

Remarkably enough, collapsing home prices have not left Spanish banks holding large amounts of bad mortgage loans, thanks largely to the fact the Spanish mortgage market operated during the boom in far different ways than the American market.

But if lending to home buyers was conducted in a far more prudent manner than it was in the United States, lending to real estate developers and construction companies was, if anything, more irresponsible. The higher land prices went, the more eager the banks were to push out loans.

The story of how Spain’s banks got into the mess — and the way its mess differs from that of American banks — show that it is impossible for banks to walk away from a collapsing bubble in real estate. It also shows that the structure of mortgage markets can make a major difference in how a collapse plays out.

The figures released by the central bank this week showed that by the middle of this year, 17 percent of Spanish bank loans to construction companies and real estate developers were troubled — or "doubtful," the term favored by the central bank. That figure has been rising rapidly, reflecting the deterioration in real estate values.

When the financial crisis first broke out, in 2008 and 2009, it appeared that Spanish banks were in a better position than most, in part because of regulation that had kept the big banks from making some of the mistakes others made.

But it turned out that smaller Spanish savings banks were heavily exposed to a real estate market that had outpaced even the United States’ market for a time during the first decade of this century. That market continued to rise after the American housing market stopped climbing.

The Bank of Spain has created a program to force mergers of the smaller banks and to bring in better management. It has put about 11 billion euros into the banks to recapitalize them, and is putting in another 15 billion euros in a process that is supposed to be completed by the end of this month, said Antonio Garcia Pascual, the chief Southern European economist for Barclays Capital. But, he added, "our estimate is that the overall number needed is closer to 50 billion euros."

The banks are bleeding from loans secured by raw real estate, and from loans for construction. The pain is made worse because such lending soared during the property boom. It is those loans that are now devastating bank balance sheets, as developers who borrowed to build offices, stores and neighborhoods saw demand dry up and now cannot pay the banks back.

Other corporate loans are also showing weakness, as would be expected when unemployment is above 20 percent and not expected to improve for at least two years, but less than 5 percent of those loans are said to be doubtful. There are also signs of trouble in car loans and other loans to individuals.

And then there is the mortgage market. Perhaps the most remarkable statistic in the reports released by the Bank of Spain this week was the low percentage of mortgage loans that appeared to be in trouble. It is just 2.5 percent, half a percentage point less than in mid-2009. If American mortgages were doing as well, there would be far less angst here.

How can that be? The most important fact may be that refinancing is very unusual in Spain. They are generally unnecessary; since mortgage loans are made at variable rates, there is no need to take out a new loan if rates are declining. The absence of refinancing, along with the absence of home equity lines of credit, meant homeowners could not take out cash to spend on other things.

As a result, if you bought a house in Spain a few years before the peak, you still have equity in the home, even with prices down. If you lose your job and can no longer afford the payments, you can sell the home and emerge with something.

That would also be true in the United States if mortgages were for only house purchases. But in the housing cycle that led to the recent bubble — unlike previous cycles — it was far easier for homeowners to cash in their equity and use the money for whatever they wanted. So some people who have been in the same home for decades are desperately under water.

There were other differences as well. There were no "originate-to-distribute" strategies in the mortgage markets, so the loans were not bundled into securities to be sold to foolish investors.

Banks that made the loans expected to profit if — and only if — they were repaid. There were few loans to investors who planned to rent or flip homes. Moreover, mortgage loans in Spain are recourse. Buyers cannot walk away if they have other assets, as they can in some American states.

The Bank of Spain has said it is emphasizing transparency in seeking to fix the banking system, and that it is willing to be flexible as conditions change. Its openness may be winning over investors. No one likes to hear bad news, but it is reassuring to believe that the news is accurate, rather than sugar-coated.

I have not seen other banking regulators distributing charts forecasting that the biggest problem facing their banks was likely to get significantly worse, as the Bank of Spain did this week. It has been more common for regulators to seek to weaken accounting rules, on the theory that it will help confidence if banks seem to be strong, regardless of the facts. That is an attitude that has backfired, particularly after the European stress tests chose to assume that all sovereign debt was safe.

Rather than denigrate markets as being foolishly negative — as some other European officials have done recently — Mr. Roldán cited market trends, including the rising cost of credit-default swaps on the banks, as evidence of the problems confronting them. It is a refreshing attitude in a regulator. When, and if, Mr. Roldán ever starts to say the worst is over, it will be a lot easier to believe him.

Ever since UBS disclosed its latest gigantic loss, due to a supposedly rogue trader in London, the financial press has been obsessed with digging out trivial details, such as what the scandal means for the future of global banking regulation and whether it will cost UBS Chief Executive Officer Oswald Gruebel his job.

Then there’s the real story. Inside UBS’s vast investment- banking operation, we can pretty well guess there’s only one question that matters: "Does this affect my pay?" The short answer is it might. Only it doesn’t have to be this way.

On Sept. 19, Bloomberg News published an article under the headline, "UBS Bonuses at Risk as $2.3 Billion Trading Loss Erases Profit." As you can see, this year’s UBS bonus pool isn’t doomed, per se. It’s "at risk." And where there’s a risk there’s always a way. What the UBS bankers need is a plan to ensure that the people who bear this loss are people other than themselves.

Luckily, I have prepared one. To save the UBS bonus pool, UBS’s leaders must persuade the people of Switzerland to eat the losses the company is blaming on Kweku Adoboli, and to do so with joy in their hearts. Impossible, you say? Consider the following talking points:

No. 1: Reimbursing UBS for the $2.3 billion would be an investment in the country’s future.Surely it will cost Swiss taxpayers much more money later if they skip paying this small ante now. UBS’s writedowns during the last financial crisis topped 50 billion francs ($56 billion).To keep UBS afloat, the Swiss government put up 6 billion francs of bailout dough and took almost 40 billion francs of rotting assets off the company’s books. Better for the Swiss to nip these new "rogue trading" losses in the bud while they can.

No. 2: If the bankers don’t get their bonuses, the best and brightest UBS employees will leave for competitors.Somebody has to stick around to clean up the mess being pinned on Adoboli. The Swiss must decide: Do they really want all of UBS’s best talent to leave for National Bank of Greece? Or worse, Deutsche Bank? This, too, would inevitably lead to even bigger losses later, which brings us to our next point.

No. 3: UBS isn’t actually a bank.The Swiss government is the bank here, not UBS. In reality UBS is an off-balance-sheet SIV, or structured-investment vehicle, backed by the Swiss government. UBS shareholders and employees are the SIV’s "first-loss holders," as they’re known in the trade. (UBS bondholders, as we all know, are prohibited by international law from incurring losses.)

Normally the first-loss holders would exist to serve as a buffer, like swampland absorbing the storm surge from a hurricane, except these aren’t normal times. The better off the first-loss holders are, the safer the world will perceive UBS to be. So when the Swiss people rescue the UBS bonuses, what they’re doing is restoring the first-loss cushion to its rightfully bloated condition. And by doing so they’re saving themselves.

No. 4: Rescuing the bonus pool promotes Swiss competitiveness.Anyone with even a passing knowledge of international debt markets knows that the price of Swiss government bonds has become ludicrously expensive. The flight into Swiss francs earlier this year has made life miserable for Swiss exporters. A standard-issue Rolex costs more than a five-bedroom house in Detroit.

Viewed in that light, it could reasonably be argued that UBS isn’t losing anywhere near enough money to meet Swiss society’s needs. UBS finished last year with $1.4 trillion of assets, almost triple the size of Switzerland’s $524 billion annual gross domestic product.

Rather than purchasing unlimited quantities of foreign currencies to stop the franc from strengthening, a more efficient approach would be to tell the world that UBS is in grave danger of failing and that the Swiss people are eager to pay UBS bankers whatever bonus money is needed to turn the government’s budget surplus into a crippling deficit. With one bold gesture, the franc would plunge to new depths. Yields on Swiss government bonds would soar. And all of Switzerland would be richer for it.

No. 5: This is a matter of fairness.When poor people lose their money, it’s a tragedy. There are so many of them, and they had so little to start with, there’s not much government can do, unlike with the wealthy. So the question must be answered: Is it really fair that hundreds of high-net-worth UBS professionals should pay for the alleged sins of a lone 31-year-old Ghanaian trader, just because they failed collectively to oversee him?

The U.S. let American International Group Inc. (AIG) pay more than $400 million in employee bonuses after that company’s $182 billion government bailout. Shouldn’t UBS bankers have available to them the same kind of social safety net that exists for others of their class? Discuss.

No. 6: The fundamentals of capitalism are at stake.To paraphrase a line from AIG’s rescue plea, government backstops are the oxygen of the free-enterprise system. Without the promise of protection against life’s adversities, the fundamentals of capitalism are undermined, and we would all be on the road to serfdom.

The failure of the UBS bonus pool at a time of major global and economic instability would exacerbate the challenge of reigniting consumer confidence. Because Swiss banking has changed greatly in character over the last decade -- from just a basic provision of tax-evasion services to a vehicle for massively leveraged speculative wagering -- the effects of disrupting the industry are wide-ranging and significant.

The message for Switzerland is simple: You can’t fix the UBS bonus pool unless you save it first. I’m confident the Swiss will do the right thing.

Since the nuclear disaster at Fukushima, the power plant's operator TEPCO has relied on temporary workers to help bring the reactors under control. Many of the workers, whose radiation levels are measured daily, say they are not doing the work for Japan, but for the money. SPIEGEL visited J-Village, which is strictly off-limits, and met the unsung heroes of Fukushima.

Milepost 231 now marks the end of the road. Barricades prevent traffic from proceeding farther north on Highway 6, a four-lane road that leads to the ruin of the Fukushima Daiichi nuclear power plant. Men in uniform are waving stop signs. In the evening twilight, a red illuminated sign flashes the following message: "No access… disaster law." Two policemen armed with red glow sticks vigorously turn away every lost driver. Three of their colleagues are blocking the exit to the right. They yell at anyone approaching on foot.

A total of 20 officers guard this intersection, day and night. To the right of the road block, the highway leads to J-Village, a former training center for the Japanese national soccer team. Since March 11, Japan's largest soccer complex has been transformed into the base camp for Japan's peculiar heroes -- the workers who are trying to regain control of the crippled Fukushima Daiichi nuclear power plant.

More than 1,000 of these workers prepare themselves for their shifts here, day after day. The TEPCO power company, which is the operator of the stricken nuclear power plant, sponsored construction of the sports facility years ago. Since it has become the hub for the nuclear cleanup workers, though, the company has sealed off the area to the media and the general public.

Only buses and vans with a TEPCO authorization on the front windshield are allowed to pass. The vehicles shuttle workers to the reactors and back to J-Village. The heads of the exhausted men are visible through the buses' windows: Many of them have fallen asleep during the over 30-minute trip home.

In one of the buses that struggles up the hill to J-Village sits Hitoshi Sasaki, 51, wearing a white Tyvek suit. The construction worker started here three weeks ago. His job is to surface a road to the destroyed reactor. The job involves laying down steel struts that will make it possible to support a 600-ton crane, which will be used to pull a plastic protective cover over the ruins.

Standing in Line for Radiation ChecksSasaki's first stop in J-Village is the gymnasium to the right of the main building. Long lines of workers wearing protective suits and masks march up to the building. There are boxes at the entrance of the gym, and Sasaki pulls the plastic covers off of his shoes and places them in the first box. Then the respirator, the white protective suits made of synthetic paper and the gloves are each placed in additional boxes.

A number of workers trudge toward the gym; hardly anyone speaks. Some stumble when they have to stoop over to strip off the plastic covers from their shoes. Others rip off their suits with both hands, as if every tenth of a second counts before they can finally remove the hot and sweaty suits from their bodies. Then they stand in line for radiation checks.

Most workers wear only long-sleeved dark-blue underwear under the suits. Those who have to spend particularly long periods in the oppressive heat and humidity are also allowed to wear turquoise vests under their protective suits. These vests contain a coolant designed to protect the men from heat exhaustion. Several workers have already collapsed. In August alone, 13 were admitted to an emergency room set up in front of reactors 5 and 6. A 60-year-old worker died in May, presumably of a heart attack.

A team of workers who have been quickly trained in radiation levels checks each man's exposure. The inspectors are wearing protective suits, blue caps and paper masks. Under the basketball hoop at the end of the gym, folding tables have been set up with four mobile Geiger counters, and next to these are three permanently installed radiometers.

The inspectors are holding bulky instruments and gazing at the gauges. They move the sensors first over the head of each worker, then left and right along the arms, chest, abdomen and legs. During the check, the workers stand on a mat with an adhesive film designed to capture radioactive particles. Many of the men are young and look as if they are in their early twenties, but a number of weary old men are also among them.

Temporary Workers Doing the Dirty WorkOne of the workers feels that the public has a right to know what is happening in J-Village. He has decided to speak with SPIEGEL, although he would prefer not to give his name. He will be referred to as Sakuro Akimoto here. On busy days, he says, more than 3,000 workers pass through the radiation detection station.

Every day a brigade is deployed to the Fukushima Daiichi nuclear power plant in an attempt to bring the stricken reactor under control. The workers toil in sweltering heat and dangerously high radiation levels. The maximum annual dose for workers in Japanese nuclear power plants is normally 50 millisievert. After consulting with the authorities, TEPCO has decided to raise the maximum allowed dose to 250 millisievert, high enough to significantly increase the likelihood of developing cancer.

Some 18,000 workers have helped manage the disaster since March 11. Most of them are not employed by TEPCO, but by subcontractors, who in turn recruit their workers from temporary employment agencies. Before the tsunami, many of these temporary workers had already done their fair share of the dirty work at other nuclear power plants. Most of them are not doing this to save Japan, but to feed their families. Sasaki, the construction worker, has also come for the money. He was approached by a company from Hokkaido in northern Japan where he lives. As a young man, he had helped with major overhauls at other power plants.

Each morning, says Sasaki, he dons his suit and mask in J-Village, and makes a second stop behind the plant's gates. Here he has to put on a lead vest, and over this an additional protective suit made of especially thick material, safety glasses, a mask that covers his entire face, and three different pairs of gloves, one on top of the other. "It is so unbearably hot," says Sasaki. "I feel like pulling the mask right off my face, but that's not allowed anywhere." Nonetheless, there are reports of workers who take off their masks, sometimes to smoke a cigarette.

'It Looks Much Worse There Than on TV'There are meetings in the morning where every worker finds out what he is doing that day, after which the buses head off to the reactor. Sasaki is only allowed to work one hour per day, or at most 90 minutes, otherwise he will receive an excessively high dose of radiation. Then he heads back to J-Village, and on to his boarding house in Iwaki- Yumoto, where he shares a room with three men. Days like this have him on the go for six hours.

Sasaki is a small but muscular man. His arm muscles ripple under his black T-shirt. He vividly remembers how he saw the destroyed reactor for the first time in mid-August. "It looks much worse there than on TV," he says. "Like New York after September 11. Destruction everywhere." He hasn't told his family that he works at the plant. He doesn't want them to worry.

He has his own worries. He needs the money, which is just under €100 a day. But if things keep going like this, he says that he will only be able to do the job a few more weeks until he reaches his company's radiation limits.

Workers Pushed to Their LimitsTEPCO is preparing to spend decades in J-Village. Workers have spread gravel around the large soccer stadium and in a number of adjacent areas. Here they have placed row after row of gray trailers. There are 40 per row and they sit two stories high, extending right up to the blue plastic seats in the stands.

The stadium's large scoreboard still hangs behind this makeshift community. The stadium clock has stopped at 2:46 p.m., which was the moment when the earthquake cut off the electricity here and at the power plant 20 kilometers (12 miles) away. Now, the power is on again and white neon lights illuminate the rows of trailers. In one room the workers can pick up bento boxes. Next door TEPCO has built a laundromat with more than a hundred washing machines. Behind the main building in J-Village, buses are parked on the former soccer fields and debris is stored in large plastic bags on the tartan track.

Stacks of Contaminated SuitsIn the courtyard of the main building, TEPCO has had a small store built, where workers can purchase cigarettes and tea. Some of them, still wearing their work overalls, have gathered around a number of ashtrays and are smoking in silence. There is an Adidas advertisement glued to one of the doors and an obsolete warning sign: "No SPIKES!" An exhausted worker is asleep on the floor in the hallway.

In the window of the atrium hang huge banners for TEPCO Mareeze, the soccer team that belongs to the energy company. In the center of the building stands a panel with a large white and green map of J-Village. There was a time when this was there to help athletes find their way around. Now, a man in a TEPCO uniform stands here and uses a red felt pen to post the current radiation levels for over a dozen different places on the premises.

Three TEPCO employees are sitting nearby with their laptops. The workers hand them their daily dosimeters. In return, they are given a receipt that resembles a cash register sales slip and shows the dose of radiation that they have received that day. In the corridors hang large framed photographs of famous moments in soccer history.

One of them shows German goalkeeper Manuel Neuer during the match between Germany and England at the 2010 World Cup. Outside on the covered playing field, eight goal posts have been pushed aside and are nestled together. Workers' underwear has been hung out to dry on one of the crossbars. At the entrance someone has used pink tape to attach a sign to the bare concrete: "Caution! Contaminated material." Behind this sign, used protective suits and masks are stacked in piles that are 4 to 5 meters high.

Three Shifts Around the ClockA stooped-over man in a white and blue uniform leads the way to the far corner, where radioactive dirt is lying in a kind of rubber pool. The man says the dirt was washed off cars that had been close to the reactor. Nearby, someone has taped markers to the artificial turf, much like the ones that runners use to gauge their run-ups. Here, however, workers have written radiation levels on the tape. With every meter that you approach the pool, the radiation levels increase: 4.5 microsievert, 7.0 and then, finally, one meter away: 20 microsievert.

The men from the radiation detection team bring new bags full of refuse from the gym out onto this field every few minutes. The work here at J-Village is less dangerous than at the reactor. "There are two types of jobs," says Sakuro Akimoto. "Either you work in J-Village for many hours with less radiation or in Daiichi for fewer hours, but at radiation levels that are 10 to 100 times higher." Akimoto is tall and wiry. He wears his hair short and loves casual jeans. He started working 30 years ago, right after leaving school, for a company that does maintenance work for TEPCO.

There are hardly any other jobs in the village where he comes from, which is located near the power plant. On March 11, he was working at the plant and was able to flee in time to escape the tsunami. His village was evacuated. A few weeks later, he says, he received the order to come to J-Village, "whether I wanted to or not." But he says he also felt a sense of responsibility because the plant had brought so many jobs to the region.

The members of the radiation detection team are now working in three shifts around the clock. He has often seen workers "at their limit -- not only physically, but also mentally." Most jobs are simply dirty work, he says. According to Akimoto, many of his co-workers who work for subcontractors had no choice but to come here. "If they refuse, where will they get another job?" he asks. "I don't know anyone who is doing this for Japan. Most of them need the money." Whenever possible, highly qualified workers like Akimoto are only exposed to comparatively low levels of radiation. After all, they will be needed later.

A Move to Raise Radiation ThresholdsIn an internal paper, Japan's nuclear safety agency NISA warns that there will soon be a lack of technicians because too many have exceeded their radiation limits. As early as next year, NISA anticipates that there will be a shortage of 1,000 to 1,200 qualified workers, "which will severely affect the work at Fukushima Daiichi and at nuclear power plants throughout the country."

The nuclear safety agency's solution is simple: create higher thresholds. It recommends raising the limits to allow workers to be exposed within a few years to significantly greater amounts of radiation than before.

By mid-August, 17,561 men had been registered at the Health Ministry as radiation workers. There are plans to monitor their health in a future study. Six of them have been exposed to radiation levels exceeding the high limit of 250 millisievert. More than 400 people have been exposed to levels exceeding the normally allowed 50 millisievert.

And TEPCO simply does not know about some of its workers. Despite months of searching, the company can no longer locate 88 workers who were employed in the power plant from March to June. The company had merely handed out badges to contractors without meeting the workers in person. Worker IDs with barcodes and photos have only recently been introduced.

Earning €100 Per DayHiroyuki Watanabe is a city council member from Iwaki, the city that lies to the south of J-Village. For the past two years, he has been trying to determine where TEPCO recruits its workers. "The structure is dodgy," says Watanabe. "It is amazing that one of Japan's largest companies pursues such business practices."

In fact, TEPCO has been using shadowy practices to acquire its workers for a number of years. In 2008, Toshiro Kitamura from the Japan Atomic Industrial Forum criticized the Japanese power company for "outsourcing most of its maintenance work of nuclear power plants to multi-layered contractors." The industry expert's main concern, however, was the safety risk, since these workers are not as familiar with the reactors as permanent employees.

According to Watanabe, TEPCO has budgeted up to €1,000 per person per day to pay the workers. But unskilled workers, he says, often receive only about €100 of that money. "These are men who are poor or old, with no steady job and limited employment opportunities," he says. Some of them don't even have a written employment contract, he contends. When they reach their radiation exposure limit, he adds, they lose their jobs and the employment agency finds a replacement.

Watanabe wants to ensure that all workers are paid appropriately. Even the lowest ranking workers should have a trade union, he says. "If we have a problem, we have nobody to turn to," says a young worker who is eating dinner along with seven co-workers at the Hazu restaurant in Iwaki-Yumoto. They are drinking beer and sake with their meal and smoking countless cigarettes. The men actually don't want to talk about the power plant -- but they go ahead and do it anyway. They also talk about their families and the fear of the radiation and its consequences.

'Somebody Has To Do It'Next door in the laundromat, 24-year-old Yutaka is stuffing his socks and T-shirts into a washing machine. He is wearing plaid shorts and a polo shirt with a matching collar. Every night in his boarding house room, he calculates his current level of radiation exposure.

"To be honest, it makes my wife worried," he says. He has no intention of quitting, however. "Somebody has to do it," he says. Yutaka is in charge of the break room. His wife has been living far from here ever since they were evacuated. "I don't know if we will ever be able to return," he says.

The presence of so many workers has fundamentally changed Iwaki-Yumoto. This small town on the southern edge of the exclusion zone was known for its hot springs, which attracted large numbers of tourists. Now, there are no more tourists, and many residents have also fled. The hot springs are still very popular, though now it is with the workers. Between 1,000 and 2,000 of them live here now, says a hotel owner in the city. There are plans to move many of them soon to new trailers on the playing fields of J-Village.

One of the workers in Iwaki-Yumoto comes from the now-abandoned village of Tomioka in the restricted area. He smokes Marlboro menthols, and his arms and legs are covered with tattoos. During the day, he works in front of reactor 4, assembling plastic tubes for the decontamination system.

The hardest thing for him, he says, is the daily trip to work. The bus drives past his house twice a day, passing directly in front of the bar where he used to play pachinko, a Japanese game similar to pinball. "I feel sad when I see it all so empty," he says. He says he dreams of returning there some day to play pachinko again.

What would happen if the Federal Reserve announced that all its assets were either being marked to zero or would not need be paid back in principal or interest? If in other words it declared it no longer had any assets.

Now most don't know what a bank asset is or what it means, here in this forum and everywhere. Which contains what I think the answer is.

Here's a bit more to think about when it comes to money: 18min presentation by Bernard Lietaer (ex-central banker of Belgium - please, read on (^_^).

The man was involved in creation of floating currencies, he "built" ECU-system before euro was introduced etc. - and guess what? He proposes local currencies to help us out. Here's his book "Creating wealth, growing local economies with local currencies". I'm hooked.

1. that a debt crisis of the present magnitude inevitably leads to a credit crunch that paralyzes entire economies, in this case even the whole global economy as we have come to know it.

2. that the banks and indeed the entire system can go belly-up.

3. we are in for a whole lot more misery.

Yet, no one near me talks about what is to befall us and what is being done to prepare. No, people around me talk about which restaurant to go eat, where to go on vacation, the next gokart to buy, the latest techie gadget, etc.

@bluebirdI have lived a time of cash-only (as a matter of fact most my life). It seemed normal at the time, although there were some weird things such as waiting in line for hours to pay the phone bill.It's not possible in Canada at his moment, that's for sure, and I bet US is in the same pickle-jar.

But at a certain point, what bills will need to be paid anyway via the financial institutions? There won't be a need for insurance for cars or health, credit cards will be extinct. Food will need to be grown locally. It seems to me people will need to have their own water well and be able to generate their own heat and electricity. That's about it...the endless camping trip.

I'm already in my 60s so depending on the timing of the global implosion, I may be able to get by, but I see very rough times ahead for my kids and grandkids.

In response to my concern about CPP investing in shopping malls a friend sent a NYT article which stated that consumption in stables/necessities is down while retail sales of " indulgences " are up. The argument in support of this bizarre consumer behaviour is that people can only do without or hunker down for so long. It is not psychologically sustainable. I had not considered this. At some point everyone needs to stimulate the dopamine response, a feel good response. And shopping, not drugs, looks like the method of choice. Just to-day I met a woman showing off a ring she had just purchased. It is her birthday and " she needed to treat herself ". The operative word is " need " and she did get a hit of dopamine and was smiling,feeling good.Her bottom rung financial circumstances were pushed out of mind. Buying necessities like toilet paper or fertilizers just doesn't bring on that dopamine glow.No doubt the marketers know how toprovide a feel good experience and another one and another one....

The private monopoly on nation's taxable money should be replaced by monetary oligopoly at the discretion of the legislature, rather than clowny corporatism subsuming the currency system for its own profit.

The problem this time around is that we will not have the "everything" part since energy will be limited, metals limited, survival knowledge limited, strong people limited. As I see it now, there are a lot of ‘act tough’ people but can they preserver with half the people of their town gone as in the flu of 1917-1918, can they really work (so many are obese and wimpy), can they survive an CME EMP (See Carrington Event c 1859) which will happen again. I have no doubt my dad could, even my generation and baby boomers after me are not the kind of tough that will be necessary for the future. Tell you friends to “have a nice day” and then get yourself ready for TSTHTF worse that you can imagine.

Stoneleigh gave us a map to follow: http://theautomaticearth.blogspot.com/2008/11/debt-rattle-november-30-2008-how-to.html

How are we doing on this? 1-3 done.

#4 We have a house with well (220 electric, solar and hand pump) and some land paid in full that we will not sell though we pay rent to the county in the form of taxes.

#5 Some solar, lots of stores, hand tools and knowledge to use them.

#6 Remember the group should be no larger than 200 and have a full range of ages. Many try to join a 3000 member transition group and that’s too large as per discussion here a month or so ago … think tribal. We are doing some of this but it is hard to find young people who are not clueless.

#7 We don’t have anything left over to risk, so no metals now. If PM get very cheap then we will buy some from people that need water (remember our well :).

#8 I am both the employer and employee in my wood shop.

#9 At 78, in good health but I understand I could check out at any time and I will leave a lot of good things for my grandkids. Bullroarer and various throwing sticks are the most fun.

So all up, if an old guy (and wife) can do it, the rest can do it too. It is more a matter of mind set than anything else. Of course it helps to be an “Evil Genius” :-)

thanks ash and LG for your twin comments on margin, in the context of PMs, at the end of the last thread. i still find myself losing the narrative when some though not all references to margin enter the fray. actually, i think that my grasp of finance, feeble as it was, was better in some respects back when i was learning about all this a couple years ago, during that more studious period that before the (more brief and illegitimate) mourning period.

Of course, some of the things in it I had already rediscovered for myself - as it is pretty obvious stuff really. TAE definitely helped me feel less "out on a limb". The only problem that I have with it is that I am looking after two little girls and my wife is the bread-winner. She has pretty fixed ideas about how little girls should be brought up - school, dancing classes, piano lessons, singing lessons, tennis, walks, outings and so on. I must say that I am fully in agreement with her on that. However, her income is entirely dependent on the present system continuing - with the Australian taxpayer financing healthcare. I think it is essential for us to have two different income streams - even if it means a drop in total income.

It is really quite a difficult concept to get across - she thinks that I am either planning to neglect the kids or that I want her to be a stay-at-home mother. I have even been accused of being "selfish". Quite ironic really. :)

Whatever happens, I am continuing working on my startup and we will see what that leads to.

Mish does a nice hatchet job on TD's blaming the increase in margins for the crash in PM's.

http://tinyurl.com/446hcfy

Ben

Leverage is just a fancy world for the ratio of the down payment to the entire loan. You "buy" a million dollar house to flip it and you put down 50K, you are leveraged 20 to one. By doing this you have increased the pseudo money credit supply by a million dollars. That is how such a big credit bubble got blown.

I know exactly what you're talking about. My husband doesn't even want to hear anything about what I see happening anymore. As for the rest of the family, the only one that comes close to "getting it" is my thirteen year old son. We tell each other all the time that we are going to make it, and we will drag my husband and daughter along with us.

No one else wants to hear about it either. Everyone has their head firmly in the sand.

Ilargi - Your "...what needs to be done..." comments at the end of your post falls way short of solving anything.

There are trillions in ill gotten gains that have already been monetized creating a massive poverty gap. Your solutions simply insure that they remain in power and end up with all assets, property, means of production, etc.

So, I had this old lawnmower. High quality: Honda self-propelled, mulch bag, super duty. Bought it in 1997 and abused it for 12 years with virtually no maintenance. Finally succumbed to my abuse in 2011 with bend shaft. Repair shop advised that I junk it. So, I put it out on the street, expecting that someone would come by and pick it up. This afternoon, a young lady stopped by. About 24-26 or so. Defied my latent male chauvinism by informing me that SHE was the one that wanted it, that SHE could fix the bent shaft, that she would be taking care of it. Eschewed my help in loading it into her vehicle, full of tools and workstuff…

My conclusion? Things will be okay. This chic will be ready for the revolution.

@ Bluebird, do remember how angry you became when the scales fell off your eyes and you saw the global financial mess for what it really was? I certainly went through over a year of what, in hindsight, could be called depression. I'd always lacked faith in the system, as I could see it destroying the things I love (biodiversity), but the idea that those in power could be so short-sighted that they would willingly sell future generations into poverty for a 3 year window of respite sickened me.

These aren't easy concepts to digest, and the human mind appears to be more plastic and malleable than previously thought. A solid diet of corporate propaganda accompanied by diversions and misinformation has meant that many of my generation are more outraged by that family of painted strumpets, the Kardashians, than by those who are eating away at our liberty and freedom. I've asked many friends why this is the case, and their reply is that 'I can't change things, so this is the way that I deal with them'.

I'm about to visit my grandmother to help celebrate her 90th birthday in December. She is my inspiration; she is a botanist who grew her own food and supported her family throughout the depression. A matriarch with a spine of steel, she passed her love of the environment and plants onto her children and grandchildren. Some of my earliest memories are of planting beans, learning to pickle and preserve fruits and vegetables and being told "don't fuss, it's a good source of protein' when finding half a caterpillar in my (home-grown) apple.

>>No one else wants to hear about it either. Everyone has their head firmly in the sand.<<

People always view the future using the recent past as a reference point. So this means that most people go forth looking out of the rear view mirror and until the rear view scene changes, they'll continue extrapolating the recent past to the future.

I live in what's referred to as a middle class neighborhood and if you look around, there doesn't appear to be much changing. The neighbors are still buying their kids expensive toys and are doing the same for themselves. The deli’s and the restaurants are still full with people on the weekend and everyone appears to be carefree and side eying me because I have a garden. Many of my neighbors are educated people and they must be aware of some of the things that are occurring, but I suspect for many that this is mere” background noise”. They hear it and just presume that someone will take care of it and anyone they see as having “fallen off of the wagon” just had a stroke of bad luck as this surely will not happen with them. I suspect that those who’ve fallen off the wagon are far more aware and even though they may not know all of the particulars, they know something is up. This latter group stands a better chance adjusting than the former.

I’ve always been amazed reading about ancient advanced civilizations and I’ve always been perplexed by their de-evolution. In other words, there are areas in the world where there are people who are clearly descendents of a former high culture but who lead, for lack of a better word, a more primitive existence. They seem to know little about their antecedent’s accomplishments or how they achieved them (the pyramid building cultures of Egypt and South America come to mind) . Basically, they’ve de-evolved from their former high station. I’ve always suspected that something physically cataclysmic occurred to disrupt these societies and the transmission of knowledge from one generation to the next. Depending upon how serious the events were, people could be knocked into the stone age in less than a generation. Those sharing that timeframe who were in the lesser stations were better positioned to survive by virtue of the fact that they didn’t have as far to fall. I believe this sort of displacement gives those more primitive folks an opportunity to rise in station mainly because they’re better positioned to survive the cataclysm. Displacement for one groiup can be an opportunity for another.

I think those who live under western economies face the prospect of societal de-evolution. The lack of preparedness and awareness almost guarantees that. What we don’t know, and what’s generally not considered, is which groups this situation will yield an advantage to. Within that is the genesis of a true paradigm shift.

Interesting, thoughtful comment. Have you read Dmitry Orlov's Reinventing Collapse? He quite literally wrote the book on why the collapse for higher levels of America's middle class (in America you are middle class unless you live under a bridge or own a palace) will be so much harder and traumatic than for people in the Soviet Union.

I don't know if this is relevant to your situation, but was listening to one woman's complaint that the government was cutting $2000 a year from her childcare kickback. She stated that she paid $1200 a month to keep her child there so she could work. I figure that adding that to the cost of operating a car and the losses that result from not having time to do the things that once were done by a 'housewife' likely negate most of her salary; she sounded like she had an average position in the labour force.

I don't really understand why anyone would have a child and then dump it in a holding tank to grow up a stranger, unless there was some greater good done that way, as for instance, in the case of a single mother on welfare and that sort of thing where societal support is sadly lacking.

Of course if you can manage a second income stream as well as the time to takecare of two girls more power to you. I did the stay at home for several years and never could quite manage that.

Yet--my family time is constantly hijacked by others who want to go to Disneyland, outlandish parties for 5 year olds, and a host of nonsense that does nothing to support family time.

john patrick,

I fully agree but I have managed to limit these to the bare minimum. When we were in the UK, I flatly refused to go to the Paris Disney. I mean, I lived in Paris when it began operation and I never went near it. However, 20 years ago, I did go to the one in Orlando with my son - my own silly idea.

Of course if you can manage a second income stream as well as the time to take care of two girls more power to you. I did the stay at home for several years and never could quite manage that.

scrofulous,

It is really a matter of getting their mother to content herself with earning less (her marginal tax rate is 50% anyway) and to spend more time at home so as to let me do my thing. Also, I come from a background where it is normal to employ people to make money for you, whereas she comes from a background where everything had to be done "in-house". She does not understand that many people are happy to work for others - just like she does herself. It is difficult to explain, but I hope you get my meaning.

In any case, there is no question of pushing childcare on to third-parties. It is far too important for that. :)

I am really trying to illustrate how difficult it is to get people to change a little bit.

I'm just at a total loss how a risk/commodity currency for a tiny island economy can reach parity in the predicted 12 months. Apparently it's based on Chinese grown, for the most part. But if US and Europ hit a recession, can China be far behind? Can New Zealand?

The only thing that gives me pause is these forex clowns have been right so far! The NZ Dollar has trounced the US dollar, and it's still stronger against the Greenback than it was this time last year, even despite the imminent implosion of Europe. I dunno what to think.

@paperwings - Money orders can also be purchase at my local IGA grocery and at the U.S. post office too. Note there is a small fee. I hope the Gov doesn't decide my village P.O. needs to be closed in the future.

Another reason it is difficult to disengage from financial institutions, is that social security and pensions are preferred to be automatically deposited. I suppose a person could still be sent the check directly, but a financial institution would be needed to cash it. Of course there could be a point when those incomes will no longer be sent.

I can remember when younger (50 years ago), my mom would take a day and visit the local utility companies (water, electric, gas), and pay the bills directly in cash. Nowadays, those companies could be hundreds of miles away. But in many years, we may need to be local again.

I, of course, agree with his underlying points in that article, but generally I've always been annoyed by his 90% deflationist stance, which leaves him enough room to be a near-term gold bull and not piss off like-minded libertarian readers. He's been telling people to load up on gold just like TD, because somehow it would escape the massive pressures of debt deflation while everything else crashed. He's right that the margin hikes cannot be identified as a "cause" for the sell-off, and are misrepresented by most gold bugs like TD as being pure manipulation. It is certainly an influential factor, but it also has everything to do with broad-based debt deflation and therefore is not a reason to keep buying gold, as mot ZHers would claim. So I'm glad Mish wrote that article, but now it's time he does a hatchet job on his own "deflationist" investment thesis.

CT-Hilltopper said..."No one else wants to hear about it either. Everyone has their head firmly in the sand."Very true. People roll their eyes, or change the conversation, or walk away.

Ant Whisperer said... "remember how angry you became".Yes, definitely. Still am, to a degree. But to keep from getting stressed out, I feel other people have different priorities, and I can't wake them up. People have to do that themselves.

Lynford1933 said..."The problem this time around is that we will not have the "everything" ". The U.S. has outsourced basically the 'everything'...tools, clothing, shoes, underwear, appliances, replacement parts. Stock up now!

john patrick said... "Yet--my family time is constantly hijacked by others who want to go to Disneyland, outlandish parties for 5 year olds, and a host of nonsense that does nothing to support family time."

This is my daughter-in-law and her large extended family. Every month another expensive event is held for someone, even 1 year olds. Truly, how can that many people afford all that stuff, sometimes several events per month. When we attend for our 3 grandkids, we buy them books.

They also take yearly trips to Disneyworld, cruises, and several vacations per year. Their credit cards must have large balances. It is so different than my family who paid up-front for everything, so we never were able to afford those kind of trips. We visited the local Air Force Museum, free, and went hiking and biking. When I have my grandkids, we do the free things too, and also pick flower seeds, eat strawberries from the garden, and read lots of books and play games. I'm just trying to do my small part to nurture them for the future.

Well my question about central banks abandoning the very concept of a balance sheet didn't garner any response but the whole idea is a bit too obtuse I suppose. I am just trying to find a framework, an intellectual one and mechanisms, by which massive money printing might be justified and implemented when the political pressure becomes unbearable. Not that any such monetary things will save us.

The dead end we have reached with the political economy is entirely self imposed by stupendously narrow frames of thinking. Stoneleigh and Illargi's basic concept is that as false and harmful as these walls are there is no possible way to break them down. Don't get me wrong this is not meant as a criticism for there is still not the slightest evidence that we are going to break down these walls. Walls constructed out of the chimera that is called money. I don't have the slightest idea how these walls might come tumbling down, before we have a collapse.

To go further with these scattered ramblings. As long as the collapse is not accompanied by large scale use of nuclear weapons I believe we will come out the other side without visiting JH Kuntsler's world. Why? It has something to do with information.

"What would happen if the Federal Reserve announced that all its assets were either being marked to zero or would not need be paid back in principal or interest?"

This is practically what is happening over the course of years, but it can never be "announced" to the general public. Once Pandora's box of worthless debt-assets is opened, there's no closing it until the entire system collapses. If there was such an announcement, my guess is that we would have international trade wars rapidly evolving into real wars, as well as internal revolutions throughout the developed world. Once real price discovery is finally reached for all of these debt-assets, it is game over for the debt-dollar system, which most likely equates to game over for the global financial capitalist system.

One last thought is that if I mention that our economy is unsustainable, some people seem to agree with that and say that something has to change. Yet in the next breath, most say there is nothing that they can do about it. It's as if they are looking to our leaders to tell them what to do, that they can't think for themselves.

It appears the EU leaders have become so desperate for the next to keep things together for the next few months that they actually agreed to accept Timmy's insane proposal to leverage the EFSF through the ECB. Basically, the taxpayers contributing to the fund become its equity holders, while the ECB would be its creditor. When (not if) the next PIIS defaults and the EFSF takes the losses, we all know who takes them first (equity holders). This mechanism allegedly allows them to artificially expand the EFSF without first getting Parliamentary approval, aka approval of the people contributing their money to this ticking debt-bomb.

The German condition is that Greece must be allowed to default "in an orderly manner" and bondholders take up to 50% losses. So then you will have an ECB taking 50% losses on its Greek bond holdings while simultaneously proposing to use its balance sheet to leverage up the EFSF. Hmmmmm. And don't worry about that untold trillions in CDS contracts triggered by default, we'll just keep pretending like they don't exist... This is nothing less than an improvised high-wire circus act performed by a bunch of amateurs, so, yeah, expect it to work out in a perfectly orderly manner.

Regarding operating with cash and money orders: To this day, my own 87 year old father has never used a checking account and pays all his bills with money orders. His SSI check comes in the mail and he cashes it, puts some money in savings at his credit union and brings the rest of it home. When he has a bill to pay, he goes to the local grocery store and picks up a money order. My sister, who sees after him, complains mightily about this, but he insists on handling things this way. Of course, he's only got four or five bills to pay every month because he's frugal enough not to create others and I'd say he has a real good handle on what he's spending.

Although I grew up in a city during the 1960's and 1970's, we always either had a garden or went out to farms to pick bushels of vegetables or fruits. It was a family project to snap, shuck or do whatever to prepare the stuff for caning. My mother would make our jellies, preserves and can or freeze all of the veggies. Unlike today's pantries which fit in a closet, ours was as large as a small bedroom. We must have had a years worth of food stored. My parents stored food like they did money. Both of them were depression era babies from the rural south and knew how to eliminate the need for cash for many things.

I recall being "embarrassed" about this when growing up as it seemed that few others were doing this. But I'm thankful now because at least I have a concept of how this works having lived it and observing my dad even now.

I think that in many ways, society was moved from this sort of lifestyle because it didn't support the desired economic paradigm. Can you imagine if many people had remained self sustaining and debt adverse in this way operating only with cash? Much of the complexity and opaqueness associated with today's economic system would have never arisen and we would have never had the illusory economic booms that we had.

rapier saidAs long as the collapse is not accompanied by large scale use of nuclear weapons I believe we will come out the other side without visiting JH Kuntsler's world. Why? It has something to do with information.

Funny you should mention that, as I'm listening to his World made by Hand books in audio (the only format I could find without shelling money I don't have) these days. I think he's actually very optimistic, and what he describes looks like the absolute best case scenario to me.

@Greg L & Bluebird -thanks for your input, just a moment to respond here, I'll be sitting (meditating) all day, which makes me soooo happy :) but yes, Bluebird, I'm thinking of how to negotiate the in-between time that MAY happen - when there's still a few banks around and SS checks coming for a while, and I think I could elect to have mine arrive by mail now, may experiment with that. Greg L, loved hearing about your Dad's approach, what a lovely stubborn old man!

I divide the content of commentators into their analysis of what is happening and why, and then their remedial recommendations. Mish, for example, is excellent as an analyst, but the moment the word "union" appears in his comments, I hit the scroll wheel. While he understands the dynamics of the collapse and can be useful explaining the day to day details, he really can't wrap his head around the magnitude of it. I think you need a special gene for that - I would call it the Doomer Gene. Aren't we lucky?

Kunstler can be amusing until the word Arab appears. Scroll wheel again. Reminds me of 45 years ago when I could read Russian easily, I would read Pravda occasionally, and found the criticisms of the capitalist world interesting, yet I was never tempted to relocate to the socialist utopia.

@Nassim…"I fully agree but I have managed to limit these to the bare minimum."

It's hard. I feel like I have to constantly protect the castle walls from the onslaught of folly and the damage that follows. I don't mind doing nice/fun things with others (theme park, etc..) but it should occur after the fields have been harvested and the barn is full. As it is, sunlight is wasted, and we all know what will grow in the wintertime.

@bluebird…"When we attend for our 3 grandkids, we buy them books."

Same here. Books/puzzles/music/movies. Some children's movies, such as The Snowman by Raymond Briggs, are beautifully done and host a rich learning experience.

But anyway--I know poverty is a good teacher. And I'd like to avoid the grueling aspects. But am beginning to think some things can only be learned in a furnace. Problem is, when you love your family, guess who's going in the fire with them...

I read your linked article in the nzherald, and nowhere was to be found the 800 pound gorilla in the room, namely the carry trade. The basics of the carry trade are easy to understand. The Fed lends money to its cronies at almost zero interest. The cronies can turn around and invest the free money in US 30 year bonds, thus ripping off the US debt slave, who must lend them the money for bubkas and then pay the interest for borrowing the money back (which they just lent). Nice job if you have the connections. No wonder Henry Ford once said that if the American public woke up one morning understanding how the Fed worked, you would have a revolution before evening.

But some scumbags are just too greedy to settle for a couple of percent of guaranteed, secure profit. So they look around the world to see sovereign bonds that are paying a lot more than the US T. And what do they find? OZ and NZ. Compare the rates. But this is a very dangerous gamble because underlying the profit and loss is the exchange rate. Say the hedgies are making a net 4% on the carry, and suddenly the USD firms 7% against the NZD. The hedgies are screwed and their lenders are making margin calls. So the hedgies have to sell their NZ bonds, buy USD, and pay off their lenders. Of course, this drives the price of NZ bonds down in the secondary market, drives the NZD down because it is being massively sold, and drives the USD up because it is being massively bought. A perfect, positive feed back storm. This is also the problem with the yen which has grandfathered the carry trade long before the brilliant Benster entered it. But because the Japanese export economy is so sensitive to currency, the collapse of its carry trade is killing its industry.

Every debt slave of OZ and NZ should have a working knowledge of how the carry trade works.

Mish gives a very good analysis of the EMU plan being kicked around in Washington today among the G-20. Since the brilliant, economic apparatchik, Timmah the Zodiac thought it up, it think it should be called the Timmah Plan. It involves leveraging the original ESFS 440 B by a factor of five where the ESFS would be responsible for the first 20%, and the EMU debt slaves, primarily German, would have their future income on the line for the next 80%. Of course the plan would fail in a matter of months, may a year or two at most with a miracle.

In consideration and experiences of everyones who has tried to give warnings of the impending changes and reset ...

If you had the occasion to be able to influence a politician to take action so that HIS electorates could avoid taking the disastrous path that has been taken, which we can see happening EVERYWHERE at ALL AND EVERY levels of our society,

WHAT would action plan would you recommend that he take that would give the most positive results without destroying his bully pulpit?

I have been ask to participate in an open forum and would love to be able to make a difference.

My only thought, now, would be that he should recommend that everyone should educate themselves by reading TAE, ZH, and Market ticker.

1) No more debt slave (also known as taxpayer) money is to be spent bailing out any private firms including the largest banks. We are to return to basic capitalism where private firms who make bad decisions should be liquidated based on long standing bankruptcy laws. (Since we are promoting traditional capitalism here, this could also be regarded as hoisting the pigs on their on petard clause). Senior bond holders of financial institutions are not to get any special dispensation from the government coffers.

2) Government funds should not be spent on Keynesian crony projects until all the private debt is liquidated and deleveraged, which would take several years. Government should provide basic services which would including appropriate social services and direct, subsistence welfare payments to prevent the most unfortunate from dying from starvation, disease, or hypothermia. This would also represent on a Keynesian level the most efficient way to put government credit into the economy. Starving people tend to put money back into the economy rapidly.

3) All financial fraud should be rigorously prosecuted and the perps, regardless of their social station, imprisoned, and not in Club Fed cushy institutions either. This should include politicians who are found to have accepted pay offs and bribes. The ability of the higher courts to protect their crony friends from rightful justice should be rigorously scrutinized, with judges removed when they are found to do this, and prosecuted themselves for obstruction of justice when appropriate.

I'm watching the latest Bill Maher right now (mainly to hear what Tom Morello, guitarist of RATM, has to say), and here's what I'm thinking. People like BM and Michael Moore are significantly more informed and open-minded than any conservative MSM pundit/politician out there. However, they do not understand economics/finance AT ALL. That's why they can recognize how fragile the markets are right now, but still say that Obama "averted Depression" with a straight face. Or that Dodd-Frank financial reform actually accomplished something positive for systemic stability. Or that Obama's millionaire tax proposal is a good one. They simply don't understand the Capitalist global economic system, and that leads them to believe that their "progressive, anti-establishment" ideas make sense.

Tom Morello just made a really good point on Real Time with BM. He said that every significant social change in the US has started and gained momentum from the bottom-up. He referenced women's rights and desegregation of public schools. We can add to that just about everything else. He also explained the inspiration for his latest album - a bunch of Korean factory workers (a factory making guitars) who were fired for starting a union and were financially crippled came to the US in an attempt to make money and support their families. Morello had set up a benefit concert for them scheduled for the night after the Haiti earthquake. After the earthquake, the destitute workers decided to donate 100% of the proceeds from the concert to the victims in Haiti.

The problem with achieving the most important and needed social change around the world, that of altering the relations of property under the industrial/financial capitalist system, is that it simply cannot occur from the top-down at this point. So my political advice would be to decentralize every institution of economic and political authority at the global, regional and national scale. For US politicians, that would include opting out of the WTO, IMF, BIS, UN, NATO, etc. It would also mean dismantling the federal reserve system, and returning a large amount of monetary and fiscal authority to the states. The specific mechanism of achieving this decentralization would take many different policy forms, but that's what is needed.

For those interested in the current Irish situation, Max does an unusually good interview with David McWilliams. Max actually asks good questions and then shuts up and listens. You can learn a lot from this about the total EMU situation as well. Interesting to compare Ireland and Iceland. Of course Ireland has a much larger population. But Iceland had two things that saved it. It had not had time to enter the EMU and it had a titular president that threw the monetary policy into a public referendum. By the question itself being voted on and not a party that would lie and later sell out the people once it won the election, Iceland now has economic growth. There is a lesson to be learned there by the debt slaves of Europe. Referendums not representatives on debt slavery questions.

McWilliams stated a statistic that had me fall off my chair and it would have to be researched before I accept it. He stated that USA multinational corporations have invested more money in Ireland than all the BRICs (Brazil, Russia, India, and China) combined. I could accept the first three, but China???

You know? ... I read through all the comments on this thread (and others), and I am of the opinion that all of you are taking all this financial stuff too seriously, and are needlessly upsetting yourselves, really about nothing. Life is a lot easier than you all seem to recognize.

I'm passing this on because it worked for me today. A Dr. on TV said to have inner peace we should always finish things we start & we all could use more calm in our lives. I looked around my house to find things I'd started & hadn't finished, so I finished off a bottle of Merlot, a bodle of Vodka, a butle of wum, tha mainder of Valiuminun scriptins, an a box a chocletz. Yu haf no idr how fablus I feel rite now. Sned this to all who need inner piss. An telum u luvum..

....and yet most people have intimate UNDERSTANDING (as opposed to knowledge) of the most abstract concepts such as love, compassion, and goodness.

Sciences has excelled in describing the physical world of objects quite well, yet failed miserably in understanding the conscious subject, the interactions of conscious subjects and the interactions of moral agents and moral subjects.

It is rather ironic that the more outward knowledge we have, the more outward knowledge we reveal to be unknown. Outward exploration increasingly diverges from truth. “Universal physical truth” is a paradox of sorts because the physical is fundamentally discontinuous and impermanent. Yet Science keeps on chugging, chasing what is always out of its reach, its thirst for knowledge obscuring understanding.

Thankfully the money abstraction that is surrounding us while appearing robust on the surface is actually hollowed out on the interior. These money abstractions collapse by virtue of their design. Accounting is a corner stone on which the structure is built. To remove/damage this stone by all this mark to whatever (as opposed to mark to market) accounting shuffling and accounting slight of hand only serve to further weaken the structure.

Any economic exchange depends upon one market participant’s abstractions resonating with another’s. The global credit markets (money supply) is defined by trust and confidence. Screwing with accounting standards only serves to increase dissonance between market participants, increase uncertainty, increase volatility, and create a positive feedback of fear and distrust that removes credit money from the system.

I've got the push reel mower and a hand scythe. I do need sharpening lessons for both, however. Because I busted a tiller awhile back, I suppose I'm going to be loosening my garden soil with a Jeavons Fork.

And speaking of sharpening, I believe that sharpening services will be necessary in the near future. In fact, they are hard to find (in my area) right now. Perhaps I should convince my twenty-something son to add that skill to his life as a videographer.

Well, to get back to the clown theme (or is it a global meme?), as horror movie directors know, there are few things scarier than really evil clowns. And most of the evils clowns of the planet have congregated in DC this week-end and are colluding with one another amid foul smirks and laughter, and boiling, toiling cauldrons. Many an eyeless newt and toeless frog may be found in Washington today. There are only two types of people who choose to be privy to this living nightmarish phantasm: powerless fiscal nerds (i.e. many of us) and money managers. I suspect that the latter are going to be scared so shitless that tomorrow will see some serious red flowing in the markets' gutters. But you never know. Many of them have already been pithed by Bio 101 students.

On another note, not so distant, the State of Sonora Mexico has a fabulous collection of assorted insects and various arthropods including scorpions, spiders, and creepy crawling things. Right now I have a moth at my window that has a greater wingspan than any sparrow. Must have been a hell of a caterpillar. Probably smoked a hookah or chewed Red Man.

Thanks for the ideas. Its too bad that I must make the points needed in a sound bite minute. Check this out.

Preamble:75% of the population are up to their neck in debt and would drowning if they missed one paycheck.Only 25% of retirees are on high ground and have no debt.Our political leaders and financial leaders have been saying that we are swimming in a sea of debt which cannot be paid back. This seem no different than when Noah, was advising people to build an ark, and the people ignoring the warnings of a flood.When the flood came the people pleaded to be let into the ark but the arc was full.Those who need more info can follow the info that is being presented at TAE, ZH, and Market ticker. ( I hope your aids have taken notes of those blogs so that they will become better advisors.)

Question:From your leadership position, What are you doing;so that people will act to save themselves from the debt flood that is coming? and to restrain the bankers from weighing people down with more debts?

Bosuncookie: I am a woodworker and 'sharp' is a big part of the craft. Only when I started to think of ‘sharp’ as two planes meeting at an angle did I start to get it. 20 to 25 degrees for fine light cuts like paring cuts with a chisel; 30-35 degrees for rough cuts like banging out a mortise. For really tough work and scrapers perhaps 40-50 degrees. Your scythe is a some sort of conic section and a plane meeting at an angle ( probably 25-30 degrees). The reel mower is almost 90 degree to the rotating blade and zero to the fixed blade and this is best done in place with sandpaper after the gap is widened a little. Your son will be well advised to look into the precision tools required for sharpening carbon tipped circular saw blades, planer and jointer blades. A Tormek will handle all the small sharpening chores very well. The are rather expensive. The tools are not power hungry and a small off grid solar system could run them easily if the grid goes out.

Around here there is a goto guy for sharpening but he is older than me. Someday rather soon there will be a full set of sharpening tools available just like there will be a vacant functional wood shop available someday.

When sharpening it is critical to get the angles right.For examples when I sharpen a drill and when I get the angle right than it cuts like a butter and when you have the angle wrong it is dull.I am talking about small drill bits and I was working with this person and he had a talent for sharpening these bits.

You know, it's absolutely true that people can't think for themselves anymore.

While at church this morning, a large part of the sermon was about a woman in bombed out Germany who used a five pound bag of sugar that was strapped to her back to get to france, then England, and finally to the US, bartering off the five pound bag of sugar to make it from one point to another. This made me think about how many people I know that would have to ability to think of that, instead of looking to someone else to solve their problems. It was a very short list, and another reason why we are so screwed.

The global economy has entered a dangerous phase, calling for exceptional vigilance, coordination and readiness to take bold action from members and the IMF alike. We are encouraged by the determination of our euro-area colleagues to do what is needed to resolve the euro-area crisis. We welcome that the IMF stands ready to strongly support this effort as part of its global role.****************Today we agreed to act decisively to tackle the dangers confronting the global economy. These include sovereign debt risks, financial system fragility, weakening economic growth and high unemployment. Our circumstances vary, but our economies and financial systems are closely inter-linked. We will therefore act collectively to restore confidence and financial stability, and rekindle global growth.

The Plan...

• A more integrated, evenhanded, and effective surveillance framework that better captures risks to economic and financial stability, drawing on the Fund’s Triennial Surveillance Review and spillover reports;• Early assessment of current financing tools and enhancements to the global financial safety net;• Review of the adequacy of Fund resources;• Ensuring adequate policy advice and financing to support low-income countries, including to address volatile food and fuel prices; and• Further work on a comprehensive, flexible, and balanced approach for the management of capital flows, drawing on country experiences.

I use sandpaper and a few inexpensive sharpening stones to keep things sharp or to restore a chipped chisel. Any of a number of good woodworking books will have sections on sharpening tools. I found a great article on sharpening with sandpaper in a Popular Woodworking's "Complete book of tips tricks and techniques" and I was sold. Anyone interested can read it here:http://tinyurl.com/3kb74ug

Sandpaper may not be the best sustainable long-term solution, but then again for less than $100 you can probably buy enough sandpaper to sharpen all your tools for the next 20 years.

Interesting to see that it still is going on without any mainstream media covering it. A few days ago I phoned the CBC to find out why there was no coverage and talked to a very pleasant lady in Toronto who seemed to think that British Columbia was part of the US, as she said when I told her where I was calling from, that it was a lovely State. I pretty much gave up at that point and talked to here about the weather and how muggy it was here this year. Anyway I guess I shouldn't complain about the MSM as I have not seen much about it on the blog-sites either.

Spent the weekend on the Northern CA coastline (Salt Point and Fort Ross).Lots of hardship evident.

State Parks closing and hours of operation drastically cut back. Without state parks drawing tourists, small family run hotels are closing or severely struggling. Park rangers, one of few jobs paying regular middle class wages, have their hours cut back or laid off. One ranger forced to take on odd-jobs picking grapes in the wineries with migrant labor. Lots of small modest coastal homes with for sale signs out front. The local farmers market was almost completely dead. Very few tables with folks discussing their chickens, but my wife and I were the only patrons. I don't think the doomstead in the countryside will work unless you're already wealthy. Shrinking money circulation will cause the peripheral limbs (countryside) to develop gangrene (crime and despair) followed by amputation (total cut-off) from centralized services (electricity, water treatment, law enforcement etc.)

"Cases like Florida v. Shane Guthrie help explain why. After Mr. Guthrie, 24, was arrested here last year, accused of beating his girlfriend and threatening her with a knife, the prosecutor offered him a deal for two years in prison plus probation.

Mr. Guthrie rejected that, and a later offer of five years, because he believed that he was not guilty, his lawyer said. But the prosecutor’s response was severe: he filed a more serious charge that would mean life imprisonment if Mr. Guthrie is convicted later this year.

Because of a state law that increased punishments for people who had recently been in prison, like Mr. Guthrie, the sentence would be mandatory. So what he could have resolved for a two-year term could keep him locked up for 50 years or more.

The decrease in trials has also been a consequence of underfinanced public defense lawyers who can try only a handful of their cases, as well as, prosecutors say, the rise of drug courts and other alternative resolutions.

The overloaded court system has also seen comparatively little expansion in many places, making a huge increase in plea bargains a cheap and easy way to handle a near-tripling in felony cases over the past generation."

Sydney has 14 suburbs with median prices of $2 million or more, according to Australian Property Monitors. Point Piper tops the list with its $9.9 million median price....Sydney had 106 suburbs with median house prices of more than $1 million

Where would you rather be when electricity, water treatment, law enforcement, etc. go away, the city or the country? True, the countryside will likely lose these amenities before the cities, but when the cities go too (other than a few rich enclaves), better, it seems to me, to already be in the country and learned to live without, than have to arrive unprepared.

TAE's central arguments were made with the same frighteningly clear language in 1888.

Edward M. Shephard's 1888 book "Life of Martin Van Buren" describes the factors leading up to the financial crisis of 1837 and the consequences that flowed from it.

Money Quotes....read it all:"The enormous extension of bank credits during the three years before the breakdown in 1837 was rather the symptom than the cause of the disease. The fever of speculation was in the veins of the community before "kiting" began. .....Frauds there doubtless were; but they were incidental to the honest delusion of intelligent men inspired by the most extraordinary growth the world had seen. The often quoted illustration of Mobile, the valuation of whose real estate rose from $1,294,810 in 1831, to $27,482,961, in 1837, to sink again in 1846 to $8,638,250, not unfairly tells the story. In Pensacola, lots which to-day are worth $50 each, were sold for as much as lots on Fifth Avenue, in New York, which to-day are worth $100,000 apiece. Real estate in the latter city was assessed in 1836 at more than it was in the greatly larger and richer city of fifteen years later.

We could see a market cascade over the next few weeks, likely followed by a larger counter trend rally than we've seen since the May 2nd top. Since there are many markets that are moving in concert with the ebb and flow of liquidity, we would then likely see rallies in stocks and commodities along with a fall in government bond prices and the dollar. All these moves would be counter to the larger trend, and before we get there we could see a spike low amounting to bloodbath. After any rally the downward trend will resume. There is very much further to go to the downside. The next year could be one for the record books.

Indeed bubbles and panics have happened from time immemorial, and 1837 is a good example. JK Galbraith's A Short History of Financial Euphoria is a particularly readable book on speculation and its aftermath. For a drier, but more in depth look, try Charles Kindleberger's Manias, Panics and Crashes.

Bubbles always end the same way. If we look at the record of history we can see the evidence clearly, but few people want to look. They think it's different this time. People always think it's different this time, but it never is. This one is quantitatively larger, but not qualitatively different than bubbles of the past.

I do intend to write a book integrating finance, energy and many other limits to growth. Previous books on financial bubbles have not taken the big picture approach, and previous big picture books tend to have been written by people who don't understand finance. I want to draw together as many threads as possible. We'll see when I have time. I've been concentrating on warning people in real time, while there's still time to do something.

Thank you for the recap of the carry trade. it's not something I understand very well, but it completely makes sense that it wouldn't take much to cause a "run" out of the NZ Dollar to USD. NZ has been paying 5% term deposit rates for a long while now. It attracted huge foreign investment in NZD as a result, and I can only imagine that it can't last forever..

For a long while, I understood what the "carry trade" was all about - dealers working for banks would borrow in Japan (at a very low interest rate) and then deposit it in the USA for a much higher interest rate (at that time). The dealer would usually borrow a large multiple of his capital. Although the mechanics of it are really quite simple, I just could not understand the stupidity of the participants in this risky game.

I mean, it seemed obvious to me that a dealer could "make" a very nice steady return on a highly-leveraged bet like that, but only if the exchange rates did not move in an unfavourable direction before he was able to get out of the trade.

When I read Nassim Taleb's book, it all fell into place - they really were as stupid as I thought. When the exchange-rate moves in an unexpected direction, the dealer "blows up" and is sacked, but does not have to pay back last year's bonus.

While the wind is blowing in the right direction, he has an excellent reputation for being a "smart guy" who makes a steady income every month for his employer. His boss smiles whenever he sees him.

It is a bit like a casino with a rather special roulette table. This table has the numbers 1 to 1000, the wheel is spun once every day and punters can only place one bet on one number. If the punter wins, he wins 1500 times the bet. Of course, our dealer is the banker at this peculiar casino - almost every day, he makes a good income.

Looks to me like gold bounced off the 1530s support zone - the large 3 day move triggered big time buying in asia and europe. After dropping 100 bucks earlier its now flat on the day. It is a positive sign, but we still have to see what will happen in NY.

I've never seen selling like this in gold. It really makes me a believer in the whole leverage unwind thesis. I think there was some help from bullion bank shorting, but it felt like that simply amplified a move in an already weak market. Only dollars work to repay that margin debt or close out that carry trade position.

I heard suggestions that hedge funds were dumping gold (other than bonds, gold is the only asset still up this year) to raise cash for margin calls in other areas.

Who knows what the truth is. At some level, it doesn't matter - it is really hard to argue with price and volume.

I still think the best bet is not to put all your eggs in any one basket, and don't use leverage. That way you can be wrong without becoming broke.

I also don't think the system will collapse in the next few weeks. I believe we have a few more rescue attempts queued up to run first - Timmy's money printing "solution" being the first. That, along with tossing Greece out of the zone should throw the dogs off the scent for a bit.

Stoneleigh Writing a book would be a very good idea.davefairtexIt is true that you should not have all your eggs in one basket.So in that basket you should not have real estate and stocks at this moment.

It appears the CME just hiked margin requirements on "longest-dated" T-bond futures by 20%. Perhaps Benny is not so happy with his Twist operation after all. Too bad, though, because the curve's only getting flatter.

The most glaring short-term problem with expansion of the EFSF is that it would put a much greater fiscal burden on France and Germany, and almost guarantee that the former is downgraded from its AAA sovereign credit rating. That effectively means almost the entire burden of contribution will be borne by Germany, at well over 100% of its GDP. Such a situation is obviously untenable from the start.

Any chance of a “soft landing” for the broader Chinese economny after the bubble pops? Stephen Roach seems to think so…but this may be what Morgan Stanley told him to say. I wouldn’t bet against Jim Chanos either.

Another book on the history of financial bubbles you might want to consider is Edward Chancellor’s Devil Take the Hindmost: A History of Financial Speculation (link to the book below). It is far more comprehensive than Galbraith’s very short book and far less dry and repetitive than Kindleberger’s. Also, unlike Kindleberger’s book, it is a chronological history of financial manias and panics, starting with the Dutch tulip-mania in the 1600s and ending with the beginning of the Tech Wreck (the book was first published in 2000). Chancellor’s eminently readable book is by far the best I’ve ever read on the subject of financial bubbles, and I’ve read a few. I highly recommend it.

Either a very fat finger or unpleasant rumor just hit Wall Street shortly after the opening. Curious to find out what it is. The KITCO server just crashed. Damn - too early for popcorn on the west coast of Mexico. Beer - maybe :-)

Interesting BBC segment.I would say you won't get a louder warning than this, you might send it to your "don't worry, they will fix it" friends. Because they seem rather busy positioning for the crash right about now.

Since this is my first comment directed to you, I should first thank you for the excellent work you and Ilargi have done with TAE. I came to it only this year, but it's been the most helpful thing I've encountered as far as understanding the credit economy (especially this post http://theautomaticearth.blogspot.com/2008/11/debt-rattle-november-29-2008-inflation.html and the distinction between money and credit which I previously thought were equivalent).

Anyway, if you're planning to write a book about this and want to draw together a lot of threads I recommend looking at the chapter on loan credit in Veblen's 'The Theory of Business Enterprise', which has a very nice description of the boom-bust cycle, focusing on credit and capitalization. You can find it as a pdf online.

If you are not getting money at zero interest, you are at a disadvantage and are “sucker bait” for those who are truly rich.It is now becoming “put up the cash” if you want to play the game. Margin hikes is the word that you want to look up.Very few people are using the word “market correction” or “market crash”. The new expression is “volatility”, as if nothing has changed to dampen the growth.jal

I am quite suspicious that Brian Sack of the NY Fed has called the boys back for today's opening in Europe after a well deserved vacation from two years of yeoman effort, and they are currently manning the photon torpedos to prop up the markets. Reasons for my suspicions:

Art Cashin, ancient savvy trader on the NYSE saw a Thursday-Monday collapse and is now scratching his head in puzzlement wondering who would buy into this market. Timing for covering shorts was all wrong.

Only an idiot would buy equities now with their own money. Thus the buyer must be buying with debt slave money which they can print on the spot. The Fed would only have to "seed" the market as the HFT algos would jump on board to ride the momentum.

The Dax is up over 3% while the FTSE100 is virtually unchanged. My theory is that the Fed boys didn't bother with FTSE index futures but just ES and DAX. Credit markets continue to implode. When was the last time you saw this sort of disconnect between DAX and FTSE?

But it is nice to see that the Fed is still pissing away our Benny Bux.

I have faith in the ingenuity of those currently in charge to bend the rules around until they find a way to print money in an attempt to save their banks from disaster. I can't tell you how it will happen, only that my money is on them to find another way to change the rules around once again.

The news flow should not be ignored here. Its really negative, and I believe it is being used to bludgeon those in power to acquiesce to the most recent "print money" solution proposed by the bankers.

They will run out of tricks at some point, but I don't think we're quite there yet. There are still things they haven't tried yet. Tossing a badly-behaving country off the island, for one. Just a gut feel.

I really believe they are beginning to reach the limits of their "ingenuity" within the constraints of the current economic system. A few months or even weeks ago, I probably would have agreed with you. I wouldn't have called it "faith", but I would have said there is at least a distinct possibility that they kick the can. Now, my gut instinct is that such a possibility is evaporating very quickly, and the elites will have to rely on much more explicit oppression to stay in power.

I think we already see this developing in the dialogue over bank recaps. A year ago, politicians were pouring over the details of "financial reform" mechanisms and promising the people they would never have to bail out the banks again. Now, it is basically taken as a given that priority #1 is using taxpayer money to support the banking system, especially in Europe.

The news flow has certainly taken a very negative turn, but I think the more appropriate characterization is "schizophrenic". Pull up any MSM online economic publication right now, and you will probably see a headline about imminent global recession in close proximity to one about the hopeful prospects of coordinated action. On one hand, the elites are willing to sacrifice Greece, as expected, but on the other hand, their uncertainty and fear over the contagion effects of default seems to seep through all of their statements.

I think we should remember that it's not easy being a clown with a "painted smile" these days. I mean, literally, these people have to spend most of their time in the public eye, contorting their facial muscles and flapping their gums to reflect poise, calm and hope, when they know it's not only a bunch of lies, but that very few people are buying it anymore. I know a handful of them are "sociopaths" who are desensitized to such cognitive dissonance passed the point of no return, but most of them are not.

These are upper level politicians, officials and pundits who have significant influence, whether they realize it or not. I expect we will hear more rumors of rumors of proposed solutions, and perhaps more aggressive monetary policy measures in Europe, but I also suspect there is less and less conviction behind those options now. The fiends are desperately searching for their next fix, but they're not getting it. So here comes the reaction of sickness, and it won't be pretty.

And, speaking of schizophrenic, quite the reversal of silver into the green today, while gold is still solidly in the red.

Heinberg discusses the theses in his newly published book, The End of Growth, where he attempts to integrate peak energy, peak finance, and resource depletion. If his ideas sound similar to our Stoneleigh, it is not a complete coincidence. Toward the end of the interview he gives a strong hat tip to Stoneleigh (Nicole) as a major resource in his studies. Not much new here for veteran TAEers, but interesting how the ideas of our blog are spreading.

i agree entirely with your comments in your last posting with the following exception:

"I know a handful of them are "sociopaths" who are desensitized to such cognitive dissonance passed the point of no return, but most of them are not."

I think it is a substantial majority, but I guess it depends where you draw the line. If one, like Hannibal Lecter, must have a friend for dinner, then I will concede the point.

BTW, sociopaths are not anxiety free. A friend of mine in Colorado was almost murdered by serial killer Ted Bundy, and I became interested in him because of this. He was, in fact, a very anxious person.

Heinberg also had a really good discussion with Kunstler about his new book on the "Kunstler Cast" a week or so ago. JHK obviously has his own strong opinions on these issues, which makes for a fascinating back and forth. Found here:

Part I - http://kunstlercast.com/shows/KunstlerCast_170_Richard_Heinberg-Part-1.html

"I think it is a substantial majority, but I guess it depends where you draw the line."

I meant to draw the line pretty far down the totem. Generally, I think we sometimes under-estimate how big the civil service and corporate financial sectors are, how many people within them have some level of significant discretion/authority, and how rapidly their own dissonance and fear can influence them to use that discretion towards decisions that are not in the best interests of those attempting to maintain the SQ while simultaneously maintaining the illusion of a democratic, "free-market" system.

In the past, direct and indirect coercion from the very top was more than enough to suppress the dissidence and maintain the illusion, but now we hear even relatively high up, well-known politicians, fund managers, academics, media pundits, etc. bucking the "extend and pretend" party line. Perhaps a considerable portion of this "populist dissent" is part and parcel of a larger plan towards a much more openly oppressive order, but to me that is still a clear sign that the current economic system has very few tricks left in its bag.

The political situation is quickly degenerating now, the democratic legitimacy of financial machinations is openly evaporating, and I don't care much for sickly sociopatsies and their deplorable antics, traitors and collaborators mostly. I'll continue to pay down my debt and save some cash, stock up more food, but most of the people around me are either apathetic towards collapse or too disorganised to prepare accordingly, which is disheartening.

http://www.youtube.com/watch?v=aC19fEqR5bAP01It used to be that you would hear about this kind of news from places like TAE and now it is on BBC.

We have all this advance news and still we are confused.I am in Canada and I know I should have USD but I have to hold on to Canadian dollar.Also what should we buy with our money just before the bond crash,I guess gold or land to grow food.

@JackPersonally I don't have money to buy anything at the moment. I'll just go with the flow, and try to adapt as the collapse progresses. I would go with Stoneleigh's advice if I had a significant amount of money, though, because it's the sanest advice I've heard so far, not to mention it gets proven right each passing day.

For those with liquid assets that could support a current living standard for 10-15 years, then clearly there is surplus cash that will need to be invested post-waterfall.

So far though, we have had very little advice or discussion of where these investments could or should be.

I'd like to start pooling knowledge on real estate, small businesses, and large businesses that could be useful investments post waterfall.It would be great if we could have an area in the comments or a separate site dedicated to discussion of post waterfall investments.

True political clowns are not consciously malevolent, and they cannot be traitors when their only loyalty is to the system, which they remain loyal to beyond belief, but their lack of social conscience and calculated dishonesty causes great harm.

@JackThe trader in that video seems disinterested in the great human misery about to befall us, and more interested in maximising personal gain from the initial crash. He duly notes that the great depressionary crash was immensely profitable for the ones who caused it, and he intends to profit from the coming crash as orchestrated. Being a true product of the system, such a trader could rationalise financial gigadeath if it seemed an opportunity for profit, as capital within the dying system becomes socially malevolent by necessity rather than by choice.

Charles Hugh Smith's recent book is devoted to the topic you are interested in and it makes good reading. Of course it is based on the prognosis that there will be a few bricks on top of each other and a few telephone poles vertical après le déluge.

I think there's a deal to be made; Germans agree to ECB money printing to "save the rest of europe", if Greek bondholders take haircuts and Greece is voted off the island. And at the same time, taxpayer capital gets dumped into banks as equity. Depending on the country, the equity deals may be sweet or not-so-sweet for the equity holders.

How will the market respond to this? It might work for a time. Ireland seems to be doing better than before. That might give people some hope.

Now the press just needs to generate enough fear to drag everyone along to sign on the dotted line. So far I think they're doing a great job of that. I&S seem to have no problem finding a flood of mainstream negative articles about impending eurodoom.

Sometimes prices can be clues as to how things are proceeding behind the scenes. DB, for instance, is up an absurd +12% today after being up perhaps 8% Friday. Many US banks were up 6-7% on good volume. This is a Clue. Bankers are currently totally plugged in to the political process. So when the bank stocks rally, it is likely that Something Good for Banking is in the works. The bankers are front-running the news by buying the stocks of their more beaten down and vulnerable bretheren. And I'm guessing this says DB won't need an equity injection.

If I'm right about the deal in progress, we should see no more margin-driven selloffs, and the equity market should rally on no particular news (although some bloomberg writer will make up something silly to explain it), led by the financials. That would be the signs that the big boys are buying in advance of the news.

Of course it could all be a mirage, but when money and bankers are involved, I think its more likely than not there is fire behind the smoke.

Well, you are correct that the DAX (and then the S&P) are up big time today mainly because Merkel has signed on to the bankers' suicide pact. But the deal for a leveraged EFSF is not in the bag. The head of the German central bank is adamantly and publicly against it, and going toe to toe with Merkel in the press. Her party has lost its last 6 elections. The big banks think they can steamroller this so they bought back into their own equity. We will see. The German sheeple are not quite as ignorant as the Usanistani.

"Of course it could all be a mirage, but when money and bankers are involved, I think its more likely than not there is fire behind the smoke."

You keep you making statements like that, I'm gonna be forced to conclude you're working for Them... ;-)

Seriously, though, I don't buy your premise at all. I've said before that I think short-term market moves are almost 100% irrelevant to what the elites are capable of pulling off through propaganda and "compromise", regardless of what stocks are doing well (and it's not really surprising that financials would lead the way up, since they also lead the way down). No amount of artificial publicly-sponsored leverage is going to whitewash what a Greek default actually means for the financial system, let alone what the ongoing housing-led global debt deflation means. The types of movements we get on days like today just tell me how hopelessly dependent the markets are on any little rumor of centralized intervention they can shoot in their veins, which also means once those rumors wear off, or the alleged "solutions" disappoint in the least bit, which they must by definition, the confidence evaporates to a lower level from which it started, and the liquidations resume in earnest.

The guy IS a psycho, otherwise he would not be a trader, right?This is his blog:LeadingTrader. Whoo-hoo, leading trader! I'll be The One with the Most Toys! Daaa-daaa!!! Shazzam!Of course he got a big chunk of advertising, so the site is kinda slow.

"It is not immediately clear at this juncture who was selling or why - but in placing such a huge order into the market when the least number of market participants were active tells you that they were out for dramatic effect.

Anyone looking to offload significant amounts of metal at the best possible price would have done so when both London and New York were both open - this would have ensured they would have hit the market when it was most liquid and ensured they got the best price for their sale.

Clearly finessing gold into the market was not their motive - they wanted a statement."

You're dependent on SIPC holding true during a systemic crisis. Maybe? It would probably take a while to be made whole:

The Securities Investor Protection Corporation (SIPC) was created in 1970 as a non-profit, non-government, membership corporation, funded by member broker-dealers. Its primary role is to return funds and securities to investors if the broker-dealer holding these assets becomes insolvent....SIPC coverage is also limited to $500,000 per customer, including up to $250,000 for cash.SIPC

Ash: I know a handful of them are "sociopaths" who are desensitized to such cognitive dissonance passed the point of no return, but most of them are not.

Many of them may be psychopaths however, or have developed strong psychopathic tendencies, and they find it easy to lie to themselves and create their own version of reality. Psychopathy is different to sociopathy.

"Seriously, though, I don't buy your premise at all. I've said before that I think short-term market moves are almost 100% irrelevant to what the elites are capable of pulling off through propaganda and "compromise""

Hmm well I don't buy your not buying my premise! So there!

Some market moves are irrelevant - short covering, or headline-driven, etc, as you say. But some are relevant. Some moves are most definitely reflective of big money acting on inside information.

Its in the DNA of bankers to make money from everything that happens. If a banker was on the Titanic, and had inside information as to the rate of sinking, he'd find a way to make money from it. Its just what they do.

Even as this financial ship is going down, the bankers will try and make money from it. Bonuses depend on it, don't you know. And they do this using inside information. And right now, they are very plugged in to what is going on. They will know before we will how likely it is that a deal is to be made. And unlike mom & pop's trades, theirs will move the markets because they gamble with huge chunks of Grandma's deposits. And this will show up in price & volume.

I look for traces of this in "surprising" (out-of-pattern) moves in prices. I think DB might be one such move.

It is even more revealing when prices diverge from the news. News is horrible right now, especially about how all the banks are about to die, yet the banks are up two days running. Its not the public buying the banks, that's for sure. If this divergence continues, pay attention to the prices, not the news. Big money knows the real story, not MSM. MSM is the last to be told.

The move in DB makes me suspicious. Its out of pattern. It might be a Sign. It bears watching. That's my premise.

I recently came across a cash card which can be charged up in numerous currencies and used at ATMs worldwide. For example, the card might have US $1000, Euro 2000 and £500. When in the USA one would draw down the dollars and in Europe the Euros. Furthermore, these cards can be loaded up with more cash over the internet as the need arises. The fees are very reasonable and it is a lot more secure than either cash or your traditional credit/debit card - no one can get out of it more than is actually in it.

Here is one of them Cash Passport. They also give you a backup card which you keep in a different place - with its own PIN. My wife has given one to her parents who live in Russia - so that they can get cash in an emergency. The possibilities are limitless.

Nassim - Thanks! Money cards appear to be a great innovation, except for fees. But some cards say if one direct-deposits more than $500 every month, the maintenance fees are waived.And not only paychecks can be direct-deposited, but also social security checks and pension checks.

1) The bankers are politically plugged in more than any other group, including the corporate media.

2) Therefore, they will hear about proposed solutions ("deals") before any other investors do, and will front-run the markets with that inside information (hell, they may be the ones proposing the "solutions").

3) We can discern these front-running mechanisms by looking at where the "smart money" is going over the course of several days, and which stocks are leading the way (i.e. financials).

4) If financials are rallying hard, that means a significant "deal" is in the works to stabilize the financial system, and, on top of that, we should expect this "deal" to actually work, because the "smart money" bankers are betting that it will.

If that's correct, then I completely agree with #1 and #2, but completely disagree with #3 and #4. Me and you had a similar discussion before about the short-term price movements of gold. You said they were an important indication that both gold and the USD were being treated as safe havens, and that this dynamic may continue into the future. I said they were irrelevant, and that the underlying theoretical perspective suggests that gold and the dollar would not stay coupled for very long.

The same logic still applies here. First of all, the short-term price movements cannot be extrapolated into the future, and do not provide us very good insights into what the big players do or do not know. Perhaps they know a huge "deal" is coming down the pipeline, or perhaps they are just pumping the markets for a short-term trade. Perhaps a big rumor was floated and institutional investors and HFT algo bots piggybacked it. Who knows. Second, even if there is a huge deal coming down, the fact that big players are betting it will work for some significant period of time does not mean it actually will by any stretch of the imagination.

They are not omnipotent Gods among mere mortals, and I only know that because of my underlying theory. The recent market price action didn't tell me. That's not to say price action is completely irrelevant to everything. Only that it is completely irrelevant to these specific issues. Every other piece of evidence tells me the "smart money" bankers are scrambling to churn profits in any way they can as the system implodes, and it is becoming tougher and tougher for them to do so. They may get lucky for a few months and see the markets rally, but that's just what it would be... luck. They can profit on the downside of debt deflation for some time, but eventually it will kill their business model, and there's practically nothing they can do about that.

I remember reading an article written by Jeremy Grantham (I think?) where he said markets typically hold up when dealing with a single crisis at a time but do not hold up if there are multiple crises. Well, it seems pretty obvious the situation with Europe qualifies as crisis #1…but what will the second crisis be? I’m leaning towards a “larger than expected” slowdown in China and/or bursting of the Chinese property bubble.

Here is the kind of talk I am hearing around me.Europe is going to let go of Greece and than everything will be OK.I say its not only Greece there is the PIIGS and they say no that's not true.They say all the others are in good shape.I say there are 4 bankrupt countries and they say no the problem is only with Greece.The end of conversation.

- That a divergence between the news and the markets, sustained for a week or so, tends to mean that the bankers know about a big "positive" development that MSM doesn't know about. In addition, the bankers may be using MSM to produce very negative, "on the brink of disaster" news to help prepare the broader public for these "solutions" and push them through.

I believe those are valid points, and generally should be considered. However, I do not see any divergence right now. I see everything from completely inane rumors to proposed discussions of relatively more credible deals (but far from being implemented) being used to churn the markets. I also see a lot of "on the brink" headlines, but I don't see them making life any easier for the bankers right now. If anything, they seem to be a pretty accurate reflection of the fact that the global financial system is, in fact, on the brink.

Over on Zero Hedge they just posted an article with the headline : "The Federal Reserve Plans To Identify “Key Bloggers” And Monitor Billions Of Conversations About The Fed On Facebook, Twitter... "

Apparently the "First they ignore you" phase of battle is over. I suppose we can now anticipate the "Then they ridicule you" phase to be ramped up in earnest.

I believe that TAE has already experienced some of that... in the form of a series of various and occasionally imaginative 'Clown Trolls,' and maybe even a little of the "Then they fight you" phase of conflict... in the form of a few 'Counterfeit Identity' postings.

Well done. Attack is the sincerest form of compliment; consider it to be a sort of 'psychologically reversed' stamp of approval.

This "system" cannot and will not ever exist!!! All we have is fascism dressed up as democracy... eventually western democracies will devolve into fascist closed societies... but here's the kicker: we will welcome our fascist rulers with open arms...

its time for Ilagi, Stoneleigh & everyone else to accept this... the only answer is an extremely decentralized society in which no one is in charge... a truely free society where there are no guarantees only opportunities